The fault lines between domestic and offshore insurers againopened due to bills in the House and Senate of legislation thatwould reduce the tax benefits foreign insurers receive by cedingU.S. property and casualty premiums to their foreignaffiliates.

The bills are S. 991, introduced in the Senate by Sen. RobertMenendez, D-N.J., a member of the Senate Finance Committee, andH.R. 2054, introduced in the House by Rep. Richard Neal, D-Mass.,ranking member of the House Ways and Means Select RevenueSubcommittee.

They are somewhat different, however, from the proposal that hasbeen included in the Obama-administration budget for the lastseveral years.

The administration proposal would completely deny abusiness-expense deduction by U.S. insurers of premiums ceded totheir foreign affiliates. The U.S. affiliates would receive offsetsagainst this taxable income for ceding commissions, returnedpremiums and recoverables under the proposal. It would apply to theUS subsidiaries of all non-U.S. insurers as in past.

The Obama administration proposal would raise $2.5 billion inadditional revenues over 10 years, according to the Joint TaxCommittee.

The Menendez/Neal bills are projected to raise $12 billion over10 years. The bills would close the loophole by deferringdeductions for reinsurance premiums paid to a foreign affiliate ifthe premiums are not subject to U.S. tax.

Also, in lieu of deferral, foreign-based insurers may elect tobe taxed similarly to a U.S. company on the income associated withthese transactions.

The legislation allows for a tax credit to offset any foreigntaxes paid on such income to prevent double taxation. Thus, ineither case, foreign insurers will be treated similarly to theirU.S. counterparts and the legislation is consistent with tax treatyand trade obligations, according to supporters.

The Coalition for a Domestic Insurance Industry, led by W.R.Berkley, Greenwich, Conn., and Chubb, Warren, N.J., said in astatement that the bill sponsors worked with tax experts at theTreasury Department and the Joint Tax Committee in drafting thebill.

“We urge Congress to swiftly adopt the proposed legislation.Congress never intended to give a preference to foreign-controlledinsurers over their domestic competitors,” said William R. Berkley,chairman and CEO of W. R. Berkley Corporation, Greenwich, Conn.

“Closing unintended loopholes to recover lost revenue is one ofthe best ways to offset the cost of needed tax reform,” hesaid.

But R.J. Lehmann, a senior fellow a the R Street Group, aconservative think tank, voiced concern on behalf of opponents,contending that the bill “would do serious damage to U.S. propertyand casualty insurance markets, while also violating internationalcommitments made to trading partners.”

He adds, “This is a protectionist measure that serves theinterests of certain large domestic insurance companies bydiscouraging foreign-based competitors from devoting their capitalto U.S. risks.

“It also is simply bad policy, in that it would tend toconcentrate U.S. risks within the United States, rather thanallowing the global reinsurance system to spread them throughoutthe globe.”

Lehmann added that the proposals appear to violate the UnitedStates' commitment under the General Agreement on Trade in Servicesnot to subject companies to more punitive or burdensome taxationbased solely on where the company is based.

In addition, the United States is a party to more than 50in-force double-tax treaties that include commitments tonon-discrimination in the tax code, Lehmann contended.

Bill Newton, executive director of the Florida Consumer ActionNetwork, said, “The legislation introduced closely mirrors thinkingwe have seen time and again from the Obama Administration andCongress.”

Newton added, “Our concerns remain the same: instituting a taxon foreign affiliate reinsurance would only result in a morelimited US domestic insurance capacity and more expensive insurancecoverage, a major threat to homeowners and small businesses whetherthey are in Florida, Massachusetts, New Jersey or elsewhere, butparticularly those in states that are historically susceptible tonatural disaster.”