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WASHINGTON, D.C. (September 19, 2017) – A new academic article published in Tax Notes and authored by Jonathan Talisman, founding partner of Capital Tax Partners LLP, explains that the offshore affiliate reinsurance loophole must be closed to ensure tax fairness for U.S. and foreign based insurers operating in the U.S. market. Talisman notes that proposals to close the loophole do not impose a new tax but “closes a loophole to ensure that the current income tax imposed on all companies doing business in the United States is not avoided through the use of affiliate reinsurance.” Talisman represents the Coalition for American Insurance. An excerpt of the article is below.
“Insurance companies have two forms of income that are subject to tax: (1) underwriting income – generally, the amount by which premiums earned exceed losses incurred plus expenses; and (2) investment income – the earnings from investing reserves before claims are paid. Because the combined ratio for many lines of business is close to (or even more than) 100 percent, much, if not all, of an insurance company’s taxable income is derived from its investment income. Thus, if a foreign company is allowed to strip its reserves on its U.S. business to a low-tax country like Bermuda, the investment income on those reserves will be recorded as non-U.S. income and it effectively can avoid tax on most of the net income from U.S.-written business. Meanwhile, U.S.-based companies continue to pay tax on their U.S. business.
“That is why the affiliate reinsurance loophole offers tax nirvana for foreign-based insurance companies and why they are fighting so strenuously to keep it. Related-party reinsurance effectively enables foreign-based groups to shift their investment reserves on domestically written direct business to tax havens overseas, thereby allowing them to avoid U.S. tax on the bulk of their investment income. It also allows them to avoid U.S. rules requiring discounting of loss reserves, which accelerate the payment of taxes by U.S.-based groups. U.S.-based groups cannot achieve the same tax nirvana because the current tax rules require inclusion (under subpart F) in the U.S. tax base of any U.S. risks reinsured offshore.”

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The Coalition for American Insurance consists of twelve major U.S.-based insurance groups that employ hundreds of thousands of people within the United States. Coalition members provide millions of Americans with financial protection from unpredictable risks and pay substantial amount of federal, state and local taxes. The Coalition is seeking a level playing field and tax fairness for U.S.-based insurers and their consumers and employees by closing a current federal tax loophole that allows foreign-based insurers to avoid paying U.S. taxes.

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