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Offshore reinsurance transactions addressed in Obama's budget

Offshore reinsurance transactions addressed in Obama's budget

The Obama administration proposed budget released Wednesday calls for changing the tax treatment of certain offshore reinsurance transactions.

The administration wants to “deny an insurance company a deduction for premiums and other amounts paid to affiliated foreign companies with respect to reinsurance of property and casualty risks to the extent that the foreign reinsurer (or its parent company) is not subject to U.S. income tax with respect to the premiums received,” according to a Treasury Department document explaining the budget.

The change should be implemented because reinsurance transactions with affiliates that are not subject to U.S. federal income tax “can result in substantial U.S. tax advantages over similar transactions with entities that are subject to tax in the United States.”

It adds that the excise tax on reinsurance policies issued by foreign reinsurers is “not always sufficient to offset this tax advantage.” The administration holds that the tax advantages “create an inappropriate incentive for foreign-owned domestic insurance companies to reinsure U.S. risks with foreign affiliates.”

Congressional efforts to change the tax treatment of such transactions, most notably legislation introduced by Rep. Richard Neal, D-Mass., failed to win passage. The administration itself has previously advocated the change, but Congress has not acted upon it.

The property/casualty insurance industry itself is divided on the issue. The Risk & Insurance Management Society Inc. has opposed the idea.

The budget also calls for the end to tax deductions for punitive damages.

“The deductibility of punitive damage payments undermines the role of such damages in discouraging and penalizing certain undesirable actions or activities,” the Treasury document states. “Where the liability for punitive damages is covered by insurance, such damages paid or incurred by the insurer would be included in the gross income of the insured person” under the administration's plan.