NU Online News Service, Oct. 13, 2:5400 p.m.EDT

WASHINGTON—Legislation designed to close a tax loophole thatbenefits property and casualty insurers based offshore has beenreintroduced in the House and Senate.

The revised bill (H.R. 3157 and S. 1693) has been crafted todefer the deduction for reinsurance premiums paid to a foreignaffiliate if the premium is not subject to U.S. tax.

Under the revised law, foreign-based insurers will not bedisadvantaged as the legislation allows them to elect to be taxedsimilarly to a U.S. company on the income from affiliatereinsurance transactions.

The legislation also allows for a tax credit to offset anyforeign taxes paid on such income to prevent double taxation.

However, the revised bill appears to reduce or end the impact onreinsurance by exempting third-party insurance, thereby exemptingcatastrophe reinsurance purchased by entities created by the statesto reduce the cost of homeowners' coverage in coastal states.

The bill was revised with the help of tax experts and theTreasury Department to address concerns raised by prior iterationsof the legislation while still effectively closing this loopholeand restoring what domestic insurer supporters call “a levelplaying field.”

The bill was introduced by Rep. Richard E. Neal, D-Mass.,ranking member of the House Ways and Means Select RevenueSubcommittee, and Sen. Robert Menendez, D-N.J., a member of theSenate Finance Committee.

Neal's original bill would have disallowed a deduction for“excess non-taxed reinsurance premiums” paid by the U.S. units ofoffshore insurers to offshore reinsurance affiliates. It wasprojected to raise $17 billion over 10 years, $5 billion more thanthe revised bill.

It is different than the proposal in President Obama's budgetfor the past two years that would deny any deduction forreinsurance ceded to a foreign affiliate or its parent to theextent that the foreign parent is not subject to U.S. incometaxation on the premium. It would also impose other changes incurrent tax policy to raise revenues from this source.

The administration's previous proposal, for the fiscal year thatwould have started Oct. 1, was projected to raise $2.6 billion over10 years.

The budget proposed for the 2011 fiscal year would have raised$519 million in additional revenue.

Trade groups created by both sides immediately took theopportunity to renew their public-relationsbattle over the issue, which has been debated off and on inWashington, D.C. for more than 10 years.

Supporters of the legislation say the revised bill is consistentwith tax-treaty and trade obligations.

“Because the legislation does not impact third-partyreinsurance, it would have no impact on the cost or availability ofinsurance, including catastrophe coverage in coastal states,”according to William R. Berkley, chairman and CEO of W.R. BerkleyCorp. and head of the Coalition for a Domestic Insurance Industry,a group created to generate support for the bill.

The Coalition for Competitive Insurance Rates, a lobbying groupsupported by foreign insurers, immediately sent out a statementcriticizing the bill.

“The choice to single out foreign-based insurers and reinsurersis a particularly bad one at a time when we are looking to createjobs in the U.S.,” says Nancy McLernon, president and CEO of theOrganization for International Investment, in Washington, in thestatement.

She says the bill “sends an unfortunate, but clear message toglobal companies that they cannot count on being treated in a fairand equitable fashion when doing business here.”

Eli Lehrer, an expert on catastrophe and flood issues with theHeartland Institute in Washington, notes, “Everyone is looking forrevenue raisers and, certainly, the sponsors are hoping forattention from the [Joint Select Committee].

He adds, “I wouldn't expect the legislation to pass but,certainly, it has some legs.”

Lehrer explains that narrowly focused revenue provisions alwayshave a better chance than broad ones.

“And this, although an attack on American consumers, is just thesort of narrow provision that someone might be able to sneak induring the dead of night,” Lehrer says.

Ray Lehmann, deputy director of the Heartland Institute's Centeron Finance, Insurance, and Real Estate, says: “These areprotectionist measures that would reduce insurance capacity forU.S. policyholders and raise rates for many insurance consumers. Inaddition, [the law] would have the effect of concentrating morerisk domestically, rather than seeing it spread throughout theglobal insurance and reinsurance markets.”

The legislation was reintroduced in hopes that the estimated $12billion over 10 years it would generate in additional tax revenuewould pique the interest of the Joint Select Committee.

That so-called “super-committee” is trying to produce adebt-reduction plan aimed at forestalling as much as $1.2 trillionin across-the-board cuts that would kick in—evenly divided betweendefense and non-defense spending—if the legislation fails.

The committee will have until Nov. 23 to propose ways to reducedeficits. Those proposals must be voted on by Congress by Dec.23.