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Offshore reinsurance tax break under fire again

Offshore reinsurance tax break under fire again

WASHINGTON—The Obama administration is reviving its call for disallowing the deduction for excess nontaxed reinsurance premiums paid to affiliates.

The proposal comes in the administration's 2013 budget proposal, issued Monday, and casts the change as an issue of fairness. It says that reinsurance transactions with affiliates that aren't subject to U.S. income tax on insurance income “can result in substantial U.S. tax advantages over similar transactions with entities that are subject” to U.S. tax, according to the Treasury Department.

The proposal says the excise tax on reinsurance policies issued by foreign reinsurers is not always sufficient to offset this tax advantage. “These tax advantages create an inappropriate incentive for foreign-owned domestic insurance companies to reinsure U.S. risks with foreign affiliates,” according to the Treasury Department.

If the provision disallowing the deduction is approved, it would be effective for policies issued in taxable years beginning after Dec. 31, 2012.

The same proposal was contained in the administration's 2012 budget proposal, but ran into opposition from the Risk & Insurance Management Society Inc. and other groups.

RIMS and other members of the Coalition for Competitive Insurance Rates—including insurers—quickly condemned the latest proposal.

“2011 should serve as a wake-up call to those who wish to impose limits on global risk distribution via reinsurance,” said Dan Kugler, RIMS board liaison to the RIMS External Affairs Committee, in a statement issued by the coalition. “The president's proposal ignores the facts: Instituting this tax would significantly reduce America's ability to manage volatile, catastrophic insurance risk and would further burden American homeowners, large and small businesses and public-sector organizations during these challenging economic times.”

But a group of domestic U.S. insurers belonging to the Coalition for a Domestic Insurance Industry have long supported the idea of disallowing the deduction. Like the administration, members of that group say that the change is necessary to promote fairness and to help close the federal budget deficit through new revenue.

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