[Congressional Record (Bound Edition), Volume 159 (2013), Part 5]
[Extensions of Remarks]
[Pages 7263-7264]
[From the U.S. Government Publishing Office, www.gpo.gov]




    INTRODUCTION OF LEGISLATION TO ADDRESS THE TAX AVOIDANCE PROBLEM

                                 ______
                                 

                          HON. RICHARD E. NEAL

                            of massachusetts

                    in the house of representatives

                          Monday, May 20, 2013

  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 into tax havens overseas, 
thereby avoiding U.S. tax on their 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, stating 
that ``redomestication offshore will be a competitive necessity for 
many U.S. primary `specialty' insurers.'' 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. Clearly, at a time when we are considering a 
move to a territorial system with base erosion rules applicable to U.S. 
companies, we must also have ``credible'' rules to prevent base erosion 
by foreign companies doing business in the U.S.

[[Page 7264]]

  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 to take 
advantage of the tax benefit.
  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 2011, including nearly $20 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. Over 
the same period, we have seen a doubling in the growth of market share 
of direct premiums written by groups domiciled outside the U.S., from 
5.1 percent to 11.1 percent, representing $57 billion in direct 
premiums written in 2011. Again, Bermuda-based companies represent the 
bulk of this growth, rising from 0.1 percent to 3 percent, although it 
peaked at 4% before some companies moved from Bermuda to Switzerland 
seeking protection under the tax treaties. 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 57 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 13 of the largest U.S.-based insurance and reinsurance 
companies has been formed to express their concerns to Congress. They 
recently wrote to the House Ways and Means Committee's working groups 
urging passage of my proposed legislation 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. Our tax system should not favor foreign-owned 
groups over domestic insurers in selling insurance here at home.'' 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.
  But it is not only the harm to our tax base that should concern us. 
According to a 2010 investigative report in the Sarasota Herald-Tribune 
entitled ``How Bermuda Rigs Insurance Rates in Florida,'' for which the 
reporter won a Pulitzer Prize, ``Two-thirds of property insurance 
premiums now leave Florida as unregulated payments to largely offshore 
reinsurers . . . without rate control or consumer oversight.'' It 
clearly cannot be good for us to lose regulatory control over our U.S. 
insurance industry.
  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 uses a common-sense 
approach to combat earnings stripping through the use of affiliate 
reinsurance. It will effectively defer the deduction for premiums paid 
to the offshore affiliate until the insured event occurs--thereby 
restricting any tax benefit from shifting reserves and associated 
investment income overseas. This is accomplished by denying an upfront 
deduction for any foreign affiliate reinsurance (if the premium is not 
subject to U.S. tax) 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. This 
``deduction deferral'' proposal is similar to one contained in the 
Administration's budget this year.
  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.
  It is important to note that the bill I am re-introducing today does 
not impact third party reinsurance, which adds needed capacity to the 
market. Third party reinsurance 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. The LECG 
group, a respected global expert services and consulting firm, says 
that this fact alone causes opponents' claims regarding potential 
adverse effects on capacity and pricing to be untrue.
  LECG also found it highly unlikely that foreign groups would stop 
providing coverage in the U.S. market if they are required to compete 
on a level playing field with domestic competitors. But, even if they 
did, the rest of the market would quickly replace any capacity. In a 
recent Boston Globe piece, an independent S&P credit ratings analyst 
and reinsurance market expert reached the same conclusion, saying that 
any effects on capacity and pricing would be minor. The foreign 
companies' ``interest in the US market will not change. The US is the 
largest reinsurance market in the world,'' she said.
  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. In explaining the 
Administration's proposal, the Treasury Department expressed similar 
concern over the current competitive balance, stating ``Reinsurance 
transactions with affiliates that are not subject to U.S. federal 
income tax on insurance income can result in substantial U.S. tax 
advantages over similar transactions with entities that are subject to 
tax in the United States.''
  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 in order to serve the domestic market. Thus, there 
is no reason an unintended subsidy should be allowed to continue. I 
agree with the U.S. companies. ``It is time to close this loophole to 
protect our tax base and place and U.S. and foreign-based insurers on a 
level-playing field.''
  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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