The US Senate yesterday proposed draft legislation aimed at closing a "tax loophole" claimed to give some Bermuda insurance groups an advantage over their US rivals.

The move, which echoes the aims of the bill put forward in the House of Representatives by Massachusetts Democrat Richard Neal in September, was put forward by the Senate Finance Committee, which is now inviting comment from interested parties.

If enacted, the legislation would tax related-party transactions by Bermuda-based and other non-US insurers. It would apply when the US subsidiary of a Bermuda company collects premiums in the US. By taking out reinsurance with their Bermuda parents, those companies can lower their US tax bill.

"Thus, it is an efficient way of significantly reducing US tax without transferring risk," according to a Finance Committee statement accompanying the draft legislation.

Major non-US insurance groups with subsidiaries in the US, like Ace Ltd. and XL Capital Ltd., would be affected. The new law would apply only to related-party transactions, so a reinsurance transaction involving a US-owned insurer and a separate Bermuda-based reinsurer, for example, would be unaffected.

One minor difference from the Neal bill is that the Senate proposal takes into account foreign income that is already subject to US tax, to avoid over-inclusion of income.

The Coalition for Competitive Insurance Rates, a group representing non-US insurers including the Association of Bermuda Insurers and Reinsurers (ABIR), said the proposal would impose "an isolationist tariff" on international reinsurers and result in higher premiums.

In a letter to committee chairman Max Baucus, the Coalition wrote: "The US requires a large amount of reinsurance capacity, a substantial part of which is supplied by non-US reinsurance companies.

"Thus, any effort to increase the taxes on international carriers will be counterproductive because it will result in increased costs for US consumers. Furthermore, the increase in taxes could drive out competition which would pressure rates upward."

A group of US insurers, known as The Coalition for a Domestic Insurance Industry, which has long campaigned for the "loophole" to be closed, welcomed the Senate's proposal.

"It does not afford any special treatment or consideration to domestic insurers, but only reduces an unfair competitive tax advantage that favours foreign-controlled insurers doing business with their affiliates at the expense of the US Treasury and to the detriment of fair competition with domestic insurers," said William Berkley, chairman of W. R. Berkley Corporation, in a press release from the Coalition last night.