Copyright 2000 Journal of Commerce, Inc.
Journal of
Commerce
April 10, 2000, Monday
SECTION: INSURANCE; Pg. 10
LENGTH: 630 words
HEADLINE:
House bill addresses loophole in Bermuda
BYLINE: BY
RONALD GIFT MULLINS
BODY:
With competition for
commercial insurance business squeezing the last dime out of insurers' profits,
several U.S. insurers have pressured Congress to plug the ""Bermuda Loophole.''
The loophole allows offshore insurers, such as in Bermuda and Barbados,
to avoid paying U.S. tax on investment income
generated from premiums written in the United States but reinsured to the
foreign parent.
House Ways and Means Committee members
Rep. Nancy Johnson, R-Conn.; Rep. Richard Neal, D-Mass.; and Rep. Robert Matsui,
D-Calif., last week introduced H.R.4192. The bill would generally require
offshore companies to pay taxes on investment
income generated on U.S. premiums as if such transfers hadn't
taken place. Investment income has been the major, if not only, source of profit
of most property/casualty insurance companies in recent years.
This
non-payment of U.S. income taxes can produce a competitive advantage for
foreign-based insurers of as much as 10 percent or 11 percent over companies
headquartered in the United States, according to Joel Freedman, senior vice
president and director of governmental affairs for the Hartford Financial
Services Group. It is one of several U.S. insurance companies pressing for the
legislation. Other insurers are the Chubb Group, Liberty Mutual, Kemper and
General Re.
Bermuda, since the 1970s, has courted the insurance industry
offering low taxes, and light regulation. But until recently, the firms located
there were owned by U.S. concerns and generally complimented the activities of
their U.S. parents, rather than competing with them.
During the past few
years, however, a number of U.S. insurance companies have exploited the loophole
by moving their headquarters to Bermuda or Bermuda companies have acquired U.S.
insurers.
""This disturbing trend represents a double whammy for the
American taxpayer,'' said a statement from Johnson and Neal. ""It not only
deprives our country of tax revenues, but it gives foreign companies an unfair
advantage over U.S.-owned companies and their workers.''
Under the
Johnson-Neal-Matsui legislation, companies writing insurance in the United
States would be required to pay U.S. tax on imputed investment income when
premiums are sent to countries that have a corporate income tax rate less than
20 percent of the U.S. rate.
The bill would exempt from the proposed
rules those risks reinsured with companies based in relatively high-tax foreign
countries (unless such premiums are in turn passed on to a tax haven) and it
contains provisions aimed at preventing double taxation.
William
Malchodi, senior vice president and director of taxes for the Hartford Group,
said that government officials in Bermuda have accused ""us of wanting to shut
down the island's important insurance operation.''
""Far from it,'' he
said. Hartford Insurance has several insurance companies based in Bermuda, and,
he added quickly, the company pays taxes on all income generated there and
imputed to the United States.
ACE, a major insurance/reinsurance company
in Bermuda, in a statement said when the United States is rightly trying to open
the insurance markets of China and Japan for U.S. insurers, the bill can only be
seen as ""a protectionist measure and a contradictory message to allies and
competitors abroad.""
XL Capital, another Bermuda company, has been
moving reinsurance premiums from the United States to Berumda after it purchased
NAC Re in 1999.
One industry representative noted that NAC Re's reported
premiums have dropped to $66.5 million through the first nine months of 1999
from more than $370 million in the same period of 1998, indicating that the bulk
of the premiums in 1999 have been retroceded to Bermuda where investment income
will not be taxed.
LOAD-DATE: April 10, 2000
