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Tax reform takes on Bermuda tax ‘loophole’

Tax reform takes on Bermuda tax ‘loophole’

Insurance industry organizations have come down on opposing sides of proposed U.S. tax reforms that would close the so-called Bermuda tax loophole. 

Last week, Republicans in the U.S. House of Representatives released H.R. 1, The Tax Cuts and Jobs Act, which included permanently cutting the corporate rate to 20% from 35%, and repealing the estate tax and the alternative minimum tax.

Currently, foreign insurance groups are allowed to shift their U.S. reserves into low- or no-tax jurisdictions overseas through related-party reinsurance transactions, allowing them to avoid U.S. tax on their investment income. 

New York-based investment banking firm Keefe, Bruyette & Woods Inc. issued a statement Friday saying that aside from lowering the corporate tax, “KBW analysts think the planned application of that tax rate to underwriting profits ceded to foreign affiliates is the most significant component of the House Republicans' proposed tax plan for” property/casualty insurers and reinsurers and their investors.

Under legislation introduced last year by Sen. Mark Warner, D-Va., and Rep. Richard Neal, D-Mass., the deduction for premiums paid to the offshore affiliate is deferred until the insured event occurs.

“In contrast to past versions of the ‘Neal Bill,’ which proposed eliminating the deduction for insurance premiums ceded to offshore affiliates as a means of leveling the playing field between domestic and foreign (re)insurers, we believe that the current bill — which applies a 20% tax rate to profits shifted to affiliated foreign companies from U.S. entities — would apply to all industries,” the KBW statement said. 

For purely domestic insurers, KBW said, lower corporate tax rates look like a clear positive, but the firm said it suspects intense competition and regulatory pressure — depending upon the state —would negate some of the incremental after-tax underwriting and investment income upside. 

The Washington-based Coalition for American Insurance commended lawmakers for including language to close what they called the “insurance tax haven loophole.”

“By taking steps to close this loophole,” the coalition said in a statement, “policymakers are fulfilling a key pledge made in the tax reform framework to level the playing field for U.S.- based companies and halt the trend of inversions as companies move overseas.”

The statement praised U.S. Rep. Kevin Brady, R-Texas, chairman of the U.S. House-Senate Joint Economic Committee, and the committee’s members for taking “essential steps to ensure the U.S. tax system not favor foreign-based groups over American insurers in selling insurance here at home.”

However, the Coalition for Competitive Insurance Rates, also based in Washington, issued a statement saying the proposal “will shrink competition in the insurance marketplace and increase the cost of insurance coverage for consumers.”

“Pushing a Made-in-America requirement for insurance is counterproductive when it comes to disaster risk,” the statement said. “When it comes to extreme risk, all insurance companies, U.S. and foreign-based, use reinsurance in order to most efficiently and safely pool catastrophic and other risks and match capital to support those risks. Such pooling diversifies risk into a global portfolio providing substantial price and capacity benefits to insurance markets globally.”

The group added that “taxing global reinsurers as a means to provide a competitive advantage to U.S.-based insurance companies is a very risky and unnecessary move.”

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