Battle Lines Drawn Over Expected Move To Hike Taxes On Offshore Carriers

Brad Kading, president of the Association of Bermuda Insurers and Reinsurers, said his group and other foreign-based insurers expect Congress to push to add the Neal bill provisions "to any moving tax legislation" as a measure that will generate revenue. He said he expects the issue will be decided before Congress takes its summer recess in early August.

W.R. Berkley, chair and CEO of the Berkley Companies in Greenwich, Conn.–who is at the forefront of the move to add levies to offshore insurers–confirmed that domestic companies are pushing for imposition of the tax. "We will seek to have the Neal bill passed as soon as we are able to," he said. "It is easy revenue, and it is revenue that comes about without any harm to the domestic economy or domestic companies."

He added that "all we're dealing with is direct revenue paid in the U.S. Either pay the tax on it or declare yourself a domestic company."

However, Mr. Kading, citing a study done for his consortium by the Brattle Group, said the added tax will be "bad for consumers." He said the result will be $10-to-$12 billion in higher consumer insurance prices every year because the move will reduce the supply of reinsurance to the U.S. market by 20 percent.

Two Swiss Re officials–Alex Kaplan, a vice president of government affairs, and Michael Natal, a vice president for taxes–also oppose the move. "The proponents of the bill claim that it is a mechanism to prevent the shifting of profits to low- or no-tax jurisdictions," they said in a statement. "This is a fallacy–the bill is discriminatory and would target all countries regardless of each region's tax rate."

Moreover, they added, "it is risk–not profit–that is shifted offshore. A single catastrophe can quickly turn an expected profit into an actual loss, resulting in the foreign affiliate taking the hit when loss claims are ultimately paid to U.S. insureds."

Mr. Berkley argues that Swiss Re is affected "in only a modest way." He said that "what Swiss Re has done is set capital in other places, but they have to obviously write the business where the marketplace is. They write the business here and move the revenue offshore."

According to Mr. Kading, the three likely vehicles for a provision adding the additional tax include legislation extending business taxes that expired as of Dec. 31, a bill restoring the estate tax, or a bill to provide funds to create new domestic jobs.

"We don't have knowledge as to what they are doing, but we believe that is what they are trying to do," he said. "We are going to be vigilant. This is the fourth year in a row the domestic insurers have lobbied for this, and what is in their favor is that Congress is desperate for revenue."

The foreign insurers and reinsurers are using a paper written by Gary Clyde Hufbauer for the Peterson Institute for International Economics, based in Washington, D.C., to argue that, "If the Neal bill…is enacted, European countries are almost certain to bring a case against the United States in the [World Trade Organization] and seek whatever redress they can under U.S. income tax treaties."

Mr. Hufbauer further said that some foreign countries might consider tit-for-tat retaliatory legislation that would hurt U.S.-owned insurance companies."