WASHINGTON, D.C. (July 17, 2017) – The Coalition for American Insurance is urging policymakers to close an obscure tax loophole that benefits foreign-based insurance companies operating inside the U.S. at the expense of American-based companies and taxpayers. In a letter to lawmakers, the Coalition argued that the Insurance Tax Haven Loophole, which allows foreign-based companies to move their profits from U.S.-based business into tax shelters based overseas to avoid paying U.S. taxes, should be eliminated. Closing the loophole would generate an estimated $9 billion in revenue to help pay for comprehensive tax reform. Excerpts from the letter are below. To read the full letter, please click HERE.
“As you consider changes to the tax code, we urge you to close an existing loophole that permits foreign-based insurance companies to strip their income into tax havens and avoid paying billions of dollars in U.S. taxes. This Insurance Tax Haven Loophole involves the use of affiliate reinsurance by foreign-based companies to shift much of their U.S.-generated property and casualty underwriting business and investment income outside the U.S., where is it subject to a much lower, if any, tax rate. By contrast, American-based insurers must pay current U.S. tax rates on all underwriting and investment profits from similar policies. This difference in tax treatment provides foreign-based insurers with a significant tax advantage over American insurance companies in attracting capital to write U.S. business. It is the Coalition’s position that the U.S. tax system should not favor foreign-based groups over American insurers in selling insurance here at home.
“This issue is not new. Previous tax reform discussion drafts developed by former Ways and Means Committee Chairman Dave Camp and former Senate Finance Committee Chairman Max Baucus both included similar proposals to close the Insurance Tax Haven Loophole to level the playing field between U.S. and foreign-based insurers. The previous Administration’s Fiscal Year 2016 budget submission also included a proposal to address the issue. The explanation provided by the Treasury Department at the time stated, “Reinsurance transactions with affiliates that are not subject to U.S. federal income tax on insurance income can result in substantial U.S. tax advantages over similar transactions with entities that are subject to tax in the United States.” This is one the few proposals that generated consensus between the Camp discussion draft, the Baucus discussion draft and the Obama Administration’s budget.
“The goal of these proposals was to create a level playing field in the U.S. market, between American and foreign-based insurance companies, while preserving U.S. jobs and stopping the erosion of the U.S. tax base. The solution would effectively defer the deduction to foreign-owned insurers for reinsurance currently ceded to foreign affiliates until the loss is paid. Or, alternatively, foreign-based groups could elect to be taxed as U.S. taxpayers on the affiliate reinsurance. Thus, the proposals do not disadvantage foreign-based groups, but merely tax them just as U.S.-based companies are taxed on their U.S. generated income. Tax treatment of third-party reinsurance, which adds capacity to the insurance market, is not changed by these proposals.”
 It is due to the combination of the U.S. worldwide system of taxation and specific rules under subpart F of the U.S. tax code which require U.S.-based insurance groups to pay U.S. tax on all reinsurance income, including income derived from transactions related to U.S. business as well as transactions undertaken by our foreign subsidiaries not connected to U.S. business.