Senate Moving On Bermuda LoopholeWashington

The United States Senate last week approved language that wouldshut down the so-called “Bermuda reinsurance loophole,” althoughdetails were still sketchy at press time.

As part of the debate over the fiscal year 2004 budget, theSenate adopted an amendment by Sen. Carl Levin, D-Mich., aimed atpreventing U.S. subsidiaries of Bermuda-based insurance companiesfrom allegedly avoiding U.S. taxes by reinsuring business withtheir parent companies.

However, the exact language in the Senate bill is unclear. Sen.Levins office said it would provide details; however, they were notavailable at press time.

A representative of The Hartford, which has strongly supportedlegislation on this issue in the past, said the company was notinvolved in this particular effort and is still researching it.

Sen. Levin said in a press release that utilizing the U.S. taxcode and inter-company reinsurance agreements, a number ofBermuda-based property-casualty companies are using their U.S.subsidiaries to send U.S. insurance premiums out of the country andinto Bermuda, where interest can be earned on the premiums taxfree.

By sending the premiums offshore, the U.S. subsidiary of theBermuda parent is able to reduce its U.S. taxes, Sen. Levinsaid.

Comparable U.S.-owned insurers, he said, cannot function in thesame way, and as a result are operating at an unfair competitivedisadvantage.

In addition to the reinsurance issue, the amendment approved bythe Senate also would prevent U.S. companies moving theirheadquarters and corporate charters to tax havens, whilemaintaining their primary facilities in the U.S., a process calledcorporate inversion.

“While young men and women are putting their lives on the linefor us and for our country, some corporations are stiffing the U.S.by renouncing their citizenship and setting up phony corporateheadquarters in tax havens like Bermuda to avoid paying their fairshare of taxes,” Sen. Levin said.

He said he is pleased that the Senate adopted the amendmentdealing with reinsurance and inversions, but there is still a longway to go.

“The next step is to make sure that this amendment is notstripped out during the budget resolution conference with the Houseof Representatives,” he said.

National Underwriter contacted two large Bermuda-basedinsurers, ACE Ltd. and XL Capital, regarding the Senates action,but neither firm had any immediate reaction.

During previous debates, Bermuda-based insurers have said thatrisk transfer pricing rules already in place assure that the typeof tax avoidance that is the target of the amendment cannot takeplace.

Although the exact details of the Levin amendment were unclear,Sen. Levin noted in a statement on the floor of the Senate thatlast year, the Joint Committee on Taxation determined thatlegislation aimed at addressing this issue would raise some $700million over 10 years.

That legislation was introduced in the House of Representativesby Reps. Nancy Johnson, R-Conn., and Richard Neal, D-Mass., whohave introduced the legislation on several occasions.

Their most recent effort came during the 107^thCongress with H.R. 1755, which was called the Reinsurance TaxEquity Act.

Under that legislation, U.S. insurance companies that cede U.S.business to related reinsurers would be denied the deduction forreinsurance if the related company is located in a tax haven.

However, this treatment would not apply if the related reinsureragrees to be taxed on its U.S.-based risks as if it were aU.S.-based company.

Sen. Levin estimated that the total revenue arising from boththe inversion language and reinsurance language would be $4.7billion over 10 years.

Reproduced from National Underwriter Edition, March 31, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved. Copyright in this article as anindependent work may be held by the author.