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The U.S. House of Representatives has adopted a bill that will significantly revamp the U.S. tax code, including by eliminating what some observers have deemed an unfair advantage or loophole that allowed foreign insurers to move their U.S.-generated insurance profits abroad to avoid tax.
H.R. 1, the Tax Cuts and Jobs Act, passed by a 227-203 vote in the House on Tuesday, with a vote pending in the U.S. Senate, after a Congressional conference committee met last week to resolve differences between House and Senate versions of the bill. The bill would replace the current structure of corporate income tax rates, which has a top rate of 35%, with a 21% rate.
“Obviously, the legislation will impact Bermuda quite a bit, particularly from a tax standpoint, given that there will be a lower U.S. corporate rate versus what there is currently,” said Brian Schneider, Chicago-based senior director with Fitch Ratings Inc. “That relative advantage that Bermuda has had, from a tax standpoint at least, is looking to be eliminated by the provisions in the legislation. I think the overall benefit of maintaining a Bermuda domicile and having operations on the island certainly has been reduced. I don’t think it’s been eliminated to any great extent. Bermuda will continue to benefit from a strong and efficient regulatory regime. Having full equivalency under Solvency II speaks well for the jurisdiction. There will likely continue to be deep underwriting talent on the island that will continue to manage risks well.”
The Coalition for American Insurance, which consists of 12 U.S. insurers such as Chicago-based CNA Financial Corp., Boston-based Liberty Mutual Insurance, Hartford, Connecticut-based Hartford Financial Services Group Inc. and New York-based Travelers Cos. Inc., issued a statement on Monday strongly supporting the bill.
The legislation will ensure more equal tax treatment for U.S.-based insurers and consumers, according to the statement by the Coalition for American Insurance.
“Importantly, the Tax Cuts and Jobs Act helps to close the tax haven loophole in the current tax code that unfairly rewarded the transfer of profits and jobs overseas,” the Washington-based Coalition for American Insurance said. “Now, with the inclusion of the Base Erosion and Anti-Abuse Tax to impede the offshoring of profits by foreign companies to tax havens, all insurers operating in the U.S. market will do so on the most level playing field in decades.”
The BEAT provision aims to circumvent profit movement overseas by applying a minimum tax of 10% of taxable income.
"The BEAT is not discriminatory,” the Coalition for American Insurance said. “Instead, it ensures that all companies doing business in the United States will pay U.S. taxes on that business.”
However, the Washington-based Coalition for Competitive Insurance Rates expressed disappointment at the inclusion of the BEAT provision, which it said will “unfairly slap U.S. consumers and small businesses with higher insurance premiums — undoing potential tax relief they had hoped to get from this bill,” according to a statement issued on Saturday.
“The global insurance and reinsurance industry is concerned that Congress would include a provision in the Tax Cuts and Jobs Act that will serve only to ‘Americanize’ risk by decreasing capacity benefits to insurance markets globally, thus increasing U.S. prices,” the Coalition for Competitive Insurance Rates said. “This is truly a blow to consumers and business, particularly those in Florida, Texas, California, South Carolina, Louisiana and other disaster-prone states who rely on this capacity in times of catastrophe. The only winner under the double taxation (that) will result from BEAT is a group of highly successful domestic insurance companies who stand to benefit greatly from the market distortion this provision will trigger.”
“On the margin, there could be some (capacity reduction), but I don’t think it’s enough to drive the market overall,” Mr. Schneider said. “Given there will be a reduced level of tax rates here, I think that will help the competitiveness of the U.S. market to maintain prices. I think a bigger aspect of the rates … is all of the cat losses and how that’s going to push rate changes in the more immediate term. Certainly, I would expect there to be more capital in the U.S. and see more business written in the U.S., but I don’t see it changing overall capacity that much.”
The so-called Bermuda loophole allows foreign insurance groups to shift their U.S. reserves into low- or no-tax jurisdictions overseas through reinsurance transactions and avoid paying U.S. tax on their investment income.
“It will certainly reduce that quite a bit,” Mr. Schneider said of the loophole. “I think the U.S. will be able to generate some additional revenue that they wouldn’t have had otherwise. I don’t think it is a significant amount, but I think it is something that will help them generate additional revenues overall.”
The Association of Bermuda Insurers and Reinsurers referred a request for comment to the Coalition for Competitive Insurance Rates’ statement, but a spokesperson said via email that there is nothing Bermuda-specific about the tax issue.
Insurance industry organizations have come down on opposing sides of proposed U.S. tax reforms that would close the so-called Bermuda tax loophole.