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The U.S. taxpayer faces unprecedented burdens: a $700 billion rescue from the toxic effects of subprime loans, relief from Hurricanes Gustav and Ike, a National Flood Insurance Program nearly $20 billion in arrears, numerous bailouts, including AIG and other outlays.But what is truly outrageous is that the same taxpayer also subsidizes the profits of offshore reinsurance companies. Under the tax code, a foreign insurer can write U.S. business yet avoid paying U.S. income tax by using a U.S. affiliate to write business here; and then–with nothing more than a book entry–”reinsure” the business to itself, moving the premiums and loss reserves to an offshore affiliate.The result is a loss of desperately needed revenue, erosion of the U.S. tax base and increasing dependence on foreign insurance. Premium sent offshore has grown dramatically in the last decade: from $4 billion in 1996 to $34 billion in 2007. The percentage of premiums siphoned to offshore affiliates swelled from 13 percent to 67 percent–a dangerous and growing problem.Thankfully, on Sept. 18, Rep. Richard Neal (D-Mass.) took the first step toward closing this loophole. His bill, H.R. 6969, disallows deductions for excessive non-taxed premiums shifted to offshore affiliates. Just as foreign-owned U.S. companies in other industries are not permitted to avoid taxes by paying excessive interest to their offshore affiliates, H.R. 6969 would prevent foreign-owned, U.S.-based insurance affiliates from dodging taxes through excessive self-reinsurance.We applaud Rep. Neal. The tax code should not favor foreign-owned companies over U.S. companies in the taxation of income from U.S. business, and the U.S. taxpayer should not subsidize the profits of foreign-owned reinsurers.Organizations representing the foreign reinsurers complain the bill is “protectionist,” discriminates against foreign companies, would lead to increased insurance rates in disaster-prone areas, and is inadvisable in these uncertain economic times. Their arguments are baseless and misleading.The legislation does not completely close the loophole. Foreign companies could still retain some advantage. In any event, the bill explicitly allows a foreign-owned insurer the choice to be treated as a U.S. company. Foreign insurers are not disadvantaged under the bill. It is neither protectionist nor discriminatory. It simply eliminates the unconscionable advantage currently being abused by foreign insurers.The legislation would not hurt capacity. It does not apply to reinsurance purchased from unrelated parties, only to the movement of money between related parties–a simple, self-dealing book entry that contributes no capacity.Moreover, no evidence exists that the bill would increase insurance rates. Historically, the foreign reinsurance advantage has not resulted in lower prices for consumers, as demonstrated by the post-Sept. 11 and Katrina hard markets. More recently, in the soft market, the head of the Association of Bermuda Insurers and Reinsurers stated that its members were holding the line on pricing, enabling the tax loophole-enhanced profit to go to the shareholders. National Underwriter quoted the head as saying that the profit from insurance results “is going back to shareholders. It is not contributing to the downward spiral [in commercial insurance pricing]” (brackets in original).In these uncertain times, we cannot allow the U.S. taxpayer, who is being asked to bear so much, to also subsidize the profits of offshore reinsurers. U.S. companies pay their fair share of U.S. income tax. Our foreign competitors should do the same.

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