Bermuda tax loophole by imposing a new tax on foreign-owned US insurance companies.

Members of the US House of Representatives Nancy Johnson and Richard Neal introduced the Reinsurance Tax Equity Act 2001 (HR 1755) on Tuesday night.

The bill follows complaints to Congress by several large US insurers, including Chubb and Hartford, alleging that companies could move domiciles to to offshore centres such as Bermuda and avoid US taxes. They felt this gave a competitive advantage to those based offshore in low tax or no tax jurisdictions.

There were attempts to get similar legislation through last year but they failed to get acceptance from the US Treasury and Congressional committees.

The difference this time is that the issue has been broadened to potentially affect other jurisdictions as well as Bermuda.

In essence the legislation would deny a US income tax deduction on the premiums on the offshore reinsurance of US risks. These denied deductions would only be allowed later if and when reinsurance recoveries were received.

Any insurer that establishes they are subject to a foreign tax equal to a percentage of US corporate income tax or electing to be taxed based on income relating to US business could avoid the deduction deferral.

Wendy Davis-Johnson, director of communications at Bermuda-based ACE said: "Cloaked under the moniker of tax fairness, representatives Nancy Johnson and Richard Neal have introduced HR 1755, a protectionist measure aimed at improving the competitive advantage of several US based insurance companies by increasing taxes on their internationally based competitors. "The bill would extend the reach of the Internal Revenue Service in international tax matters by exempting US insurers from the proposal if they prove to the satisfaction of the US Treasury that their parent companies pay a specified level of tax in their home countries. Presumably a foreign corporation not otherwise subject to US taxation would have to submit to audit by the IRS in order to prove its case, increasing administrative costs on both public and private sectors.

"The Johnson/Neal bill is the third in a string of increasingly harsh proposals advanced by a handful of US companies all of which violate the letter and spirit of US international trade and tax policies and could have severe consequences globally on US industries and trade relations. We would hope this Congress and US Department of Treasury would carefully review the full ramifications of such proposals and reject protectionist measures such as HR 1755.'' This has only been seen as a problem in recent years. Several US insurers and reinsurers, such as Everest Re, PXRE and White Mountains, have moved from the US in order to take advantage of favourable tax situations offshore and more favourable regulations. Other offshore based insurers have acquired US insurers and reinsurers which has created the same circumstance.

Under the US tax code, if a US-owned insurer reinsures US risks with an affiliated reinsurer, investment income on reserves held is taxed in the US.

But if a US subsidiary of an offshore parent reinsures with an offshore based reinsurance affiliate, the transaction is only subject to a one percent federal excise tax, and investment income on reserves held for the US risk is not subject to income tax.

This perceived advantage arises primarily in the related party context as affiliated offshore based insurers and reinsurers may elect to transfer the connected taxable investment income among members of the same economic family, while continuing to bear the same ultimate risk.

Tax bill tabled Introducing the bill to the House of Representatives, Rep. Neal said: "Such an advantage for some foreign companies over US-owned companies is patently unfair and should be eliminated immediately. Our legislation solves the problem by deferring the deduction for reinsurance premiums until the loss is paid in recognition that the primary insurance covers US business risk. This would only apply when reinsurance to parent companies in tax havens is used.

"This is clearly a very technical issue, but that should not stop Congress from moving quickly to shut down this loophole. If we do not stop this practice other US companies will be forced to relocate to Bermuda or be bought by a Bermuda based parent in order to stay competitive.

"The matter at hand is one specific transaction that has been studied for a year at the Treasury Department and it is time to either create fair competition for US business, or declare that the US government does not care if US tax laws give a competitive advantage to foreign companies doing business in the United States.'' Mr. Neal and Ms Johnson have their constituencies in Massachusetts and Connecticut, where large US insurers are based.

BUSINESS BUC