US tax bill targets international business
US Republican lawmakers yesterday published a tax reform Bill that could have significant repercussions for Bermuda's international business sector.
While the Tax Cuts and Jobs Act has many hurdles to clear before it becomes law, one of its aims appears to be to prevent business from going offshore and to minimise tax advantages for overseas multinationals doing business in the US.
The plan proposes slashing the US tax on corporate profits to 20 per cent from today's 35 per cent rate — a change which will erode Bermuda's tax advantage over the US.
One Bermuda insurance industry source said that more significant was a proposal to levy a 20 per cent excise tax between US companies and their foreign affiliates.
This would impact Bermudian-based insurance groups with US subsidiaries, which cede premiums back to an affiliated reinsurer on the island.
A similar proposal has been made before on several occasions over the past decade without ever becoming law, first in the Neal Bill and then in a series of budgets presented by the Obama Administration. So its presence in the tax Bill will not be a surprise to many.
What may raise eyebrows is that the insurance industry was not singled out — it will apply to all non-US multinationals with US subsidiaries. This is likely to spark a concerted lobbying effort to oppose this part of the plan by many foreign multinationals who have invested in US operations, as the Bill goes through the Washington legislative process.
The broader terms also mean that unlike previous proposals that targeted property and casualty insurers, this legislation would also impact Bermuda's fast-growing life reinsurance sector.
Another group with cause for concern may be hedge fund-backed reinsurers with a focus on asset management rather than underwriting.
A segment on passive foreign investment company rules seeks to define what qualifies as an insurer for tax purposes, stating that it should have “applicable insurance liabilities of which constitute more than 25 per cent of its total assets”.
Anything less than 10 per cent would fail to qualify automatically, while between 10 and 25 per cent would be subject to an “alternative facts and circumstances test”.
The proposal echoes the Offshore Reinsurance Tax Fairness Act, legislation sponsored two years ago by Ron Wyden, a Democratic senator, who claimed that hedge-fund backed reinsurers were investment vehicles structured to avoid tax.
At the time the Association of Bermuda Insurers and Reinsurers lobbied the US Treasury, arguing that the proposals would impact bona fide reinsurers in some circumstances and proposed a “bright line harbour test” of 15 per cent reserves to assets ratio.
Ratings agency AM Best yesterday published a report — written before yesterday's Bill was unveiled — on the growing protectionist barriers faced by insurers in mature markets, which included views on US tax reform.
It said the cut in the corporate tax rate to 20 per cent could boost investment in US manufacturing and infrastructure, thereby boosting insurance demand.
Best added: “For insurance groups, it would also increase the attractiveness of underwriting reinsurance business in the US rather than offshore.
“This could have an adverse impact on the Bermudian market, which currently enjoys a significant tax advantage over its US competitors.”
US-based insurers would see their bottom line benefit from the lower tax rate and their competitive position against foreign insurers improve.
Conversely, offshore insurers losing their tax advantage would see their competitive position weaken.
“In this regard, the Bermudian market is particularly vulnerable due to its dependence on US business,” Best added.
The rating agency said that some international insurers “may be motivated to reassess group structures and the use of internal reinsurance”.
The plan would also change the treatment of overseas profits made by US companies, through a new global minimum tax of 10 per cent, which would apply to income that American companies earn anywhere in the world.
The legislation is aimed at preventing companies from shifting profits abroad and claiming some tax revenue on income earned overseas.
Under existing rules, overseas profits are not taxed until they are returned to the US, giving companies an incentive to keep that money offshore.
The Bill also targets accumulated overseas earnings being held outside the US by corporations. Such stockpiled profits held as cash would be taxed at a rate as high as 12 per cent, while income invested in less liquid assets, such as plant and equipment, would be taxed at 5 per cent.
Previously, the US has enacted “tax holidays” to encourage companies to repatriate overseas profits at a reduced rate. This Bill is different in that both proposed taxes are mandatory, although companies will be given as many as eight years to pay them.
Goldman Sachs has estimated that US corporations have stockpiled as much as $3.1 trillion overseas.
Read more in Overseas, Page 17