[Congressional Record (Bound Edition), Volume 157 (2011), Part 11]
[Extensions of Remarks]
[Pages 15398-15399]
[From the U.S. Government Publishing Office, www.gpo.gov]




 INTRODUCTION OF LEGISLATION ENDING A CURRENT LAW LOOPHOLE THAT ALLOWS 
FOREIGN INSURANCE GROUPS TO STRIP THEIR U.S. INCOME INTO TAX HAVENS TO 
                             AVOID U.S. TAX

                                 ______
                                 

                          HON. RICHARD E. NEAL

                            of massachusetts

                    in the house of representatives

                      Wednesday, October 12, 2011

  Mr. NEAL. Mr. Speaker, today I am pleased to come before the House to 
introduce legislation ending a current law loophole that allows foreign 
insurance groups to strip their U.S. income into tax havens to avoid 
U.S. tax and gain a competitive advantage over American companies. I am 
pleased to be joined in my efforts by Senator Menendez who is 
introducing the Senate companion bill.
  Many foreign-based insurance companies are using affiliate 
reinsurance to shift their U.S. reserves overseas into tax havens, 
thereby avoiding U.S. tax on their all investment income. This provides 
these companies with a significant unfair competitive advantage over 
U.S.-based companies, which must pay tax on their investment income. To 
take advantage of this loophole, several U.S. companies have 
``inverted'' into tax havens and numerous other companies have been 
formed offshore. And, absent effective legislation, industry experts 
have predicted that capital migration will continue to grow and other 
insurers will be forced to redomesticate offshore. As we grapple with 
significant budget challenges in the years to come, it is essential 
that we not allow the continued migration of capital overseas and 
erosion of our tax base.
  The bill I am introducing today does not impact third party 
reinsurance, which adds needed capacity to the market. It is a 
fundamental business technique for risk management and is to be 
fostered. Rather, the bill is targeted solely at reinsurance among 
affiliates, which adds no additional capacity to the market and is 
often used for tax avoidance.
  There have been previous attempts to address the tax avoidance 
problem resulting from reinsurance between related entities. Congress 
first recognized the problem of excessive reinsurance in 1984 and 
provided specific authority to Treasury under Section 845 of the Tax 
Code to reallocate items and make adjustments in reinsurance 
transactions in order to prevent tax avoidance or evasion. In 2003, the 
Bush Treasury Department testified before Congress that the existing 
mechanisms were not sufficient. In 2004, Congress amended Section 845 
to expand the authority of Treasury to not only reallocate among the 
parties to a reinsurance agreement but also to recharacterize items 
within or related to the agreement. Congress specifically cited the 
concern that these reinsurance transactions were being used 
inappropriately among U.S. and foreign related parties for tax evasion. 
Unfortunately, as recent data shows, this grant of expanded authority 
to Treasury has not stemmed the tide of capital moving offshore.
  Since 1996, the amount of reinsurance sent to offshore affiliates has 
grown dramatically, from a total of $4 billion ceded in 1996 to $33 
billion in 2008, including nearly $21 billion to Bermuda affiliates and 
over $7 billion to Swiss affiliates. Use of this affiliate reinsurance 
provides foreign insurance groups with a significant market advantage 
over U.S. companies in writing direct insurance here in the U.S. We 
have seen in the last decade a doubling in the growth of market share 
of direct premiums written by groups domiciled outside the U.S., from 
5.1 percent to 10.9 percent, representing $54 billion in direct 
premiums written in 2006. Again, Bermuda-based companies represent the 
bulk of this growth, rising from 0.1 percent to 4 percent. And it 
should be noted that during this time, the percentage of premiums ceded 
to affiliates of non-U.S. based companies has grown from 13 percent to 
67 percent. Bermuda is not the only jurisdiction favorable for 
reinsurance. In fact, one company moved from the Cayman Islands to 
Switzerland citing ``the security of a network of tax treaties,'' among 
other benefits.
  A coalition of U.S.-based insurance and reinsurance companies has 
been formed to express their concerns to Congress. They wrote to the 
leadership of the House and Senate tax-writing committees urging 
passage of my prior bill because, as they wrote, ``This loophole 
provides foreign-controlled insurers a significant tax advantage over 
their domestic competitors in attracting capital to write U.S. 
business.'' With more than 150,000 employees and a trillion dollars in 
assets here in the U.S., I believe it is a message of concern that we 
should heed.
  That is why I am again filing legislation to end the Bermuda 
reinsurance loophole. This proposal has been developed working with the 
tax experts at both the Treasury Department and the staff of the Joint 
Committee on Taxation to address concerns that have been raised with 
prior versions of the bill and develop a balanced approach to address 
this loophole. The proposal is consistent with our trade agreements and 
our tax treaties.
  Specifically, the proposal I am filing today effectively defers any 
deduction for premiums paid to foreign affiliated insurance companies 
if the premium is not subject to U.S. tax. This is accomplished by 
denying an upfront deduction for any affiliate reinsurance and then 
excluding from income any reinsurance recovered (as well as any ceding 
commission received), where the premium deduction for that reinsurance 
has been disallowed.
  The bill allows foreign groups to avoid the deduction disallowance by 
electing to be subject to U.S. tax with respect to the premiums and net 
investment income from affiliate reinsurance of U.S. risk. Special 
rules are provided to allow for foreign tax credits to avoid double 
taxation. This ensures a level-playing field, treating U.S. insurers 
and foreign-based insurers alike.
  The legislation provides Treasury with the authority to carry out or 
prevent the avoidance of the provisions of this bill.
  A fuller technical explanation of the bill can be found on my 
website.
  This ``deduction deferral'' proposal is similar to one contained in 
the administration's budget this year. In an effort to combat earnings 
stripping, this bill uses a common-sense approach, which will 
effectively defer the deduction for premiums paid until the insured 
event occurs--thereby restricting any tax benefit from shifting 
reserves and associated investment income overseas.
  Ending this unintended tax subsidy for foreign insurance companies 
will stop the capital flight at the expense of American taxpayers and 
restore competitive balance for domestic companies. Closing this 
loophole does not impose a new tax. It merely ensures that foreign-
owned companies pay the same tax as American companies on their 
earnings from doing business here in the United States. Congress never 
would consciously subsidize foreign-owned companies over their American 
competitors. Thus, there is no reason an unintended subsidy should be 
allowed to continue.
  Mr. Speaker, I appreciate the opportunity to address the House on 
this important matter and I assure my colleagues that I will continue 
my efforts to combat offshore tax avoidance, regardless of what 
industry is impacted.

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