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Proposed budget targets offshore reinsurer deductions

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WASHINGTON—President Barack Obama proposed a tax increase for certain reinsurance transactions in the 2011 White House budget proposal released Monday.

In the proposal, the administration seeks to generate revenue by denying U.S.-based insurance companies a deduction for certain reinsurance premiums ceded to its offshore parent.

According to the budget request, 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. Currently, reinsurance policies issued by foreign reinsurers with respect to U.S. risks generally are subject to an excise tax equal to 1% of the premiums waived. However, the Obama administration said this amount “is not always sufficient to offset the tax advantage.”

In addition, the tax advantages “create incentives for foreign-owned domestic insurance companies to reinsure direct insurance of U.S. risks with foreign affiliates, to an extent that would not occur between unrelated parties acting at arm’s length,” the proposal said.

Under the proposal, a U.S. insurance company would not be allowed a deduction to the extent that the foreign reinsurers or their parent companies are not subject to U.S. income tax with respect to premiums received, and the amount of reinsurance premiums, or net of ceding commissions, paid to foreign reinsurers exceeds 50% of the total direct insurance premiums received by the U.S. insurance company and its U.S. affiliates for a line of business.

The Obama administration’s budget did not detail any figures or specify how much revenue it expects the proposal to generate.

The proposal resembles similar initiatives launched last year by Rep. Richard Neal, D.-Mass., and Sen. Max Baucus, D-Mont., to amend the Internal Revenue Code to disallow the deduction for excess nontaxed reinsurance premiums between related parties.