3 March 2014News

Renewed tax assault may set dangerous precedent

Congressional revenue raising efforts could mean non-US reinsurers will face significantly higher US tax on affiliate reinsurance transactions, with a suggestion that non-affiliate reinsurance may be next.

That is the news from Brad Kading, president and executive director of the Association of Bermuda Insurers and Reinsurers (ABIR), who tells Bermuda:Re that while the latest round of debate at the Ways and Means Committee is nothing new, House chairman Dave Camp’s latest reform bill looks to explicitly apply US tax to the non-US affiliate reinsurance transactions of US subsidiaries.

Whereas in previous guises the reinsurance tax bill suggested that reinsurers would be able to offset their foreign tax rate, Kading explains that the new bill “clearly states you are not escaping this tax unless you are paying tax equal to or greater than US tax”.

With the highest corporate tax rate in the OECD, the wording suggests there is little chance to escape the tax dragnet.

The new discussion draft appears to be an escalation in a bill that has been considered for the past seven years—and strongly opposed by the ABIR and the Coalition for Competitive Insurance Rates (CCIR).

The bill threatens “tremendous overreach and the extraterritorial application of US tax to non-US business income”, warns Kading and is viewed by global jurisdictions and international re/insurers as an attack on non-US business.

“Europe and Bermuda have been clear that if the US does enact this bill there would be retaliation against US companies in their markets.”

He adds that the bill sets a “dangerous precedent”, opening up the potential for non-affiliate reinsurance to also be considered within the scope of US tax. If this were to occur then “any cross border business would be subject to US tax as if it were US business income”. The ramifications of such a development would be significant.

Kading says that as a result three ABIR members have already closed their US subsidiaries over the past three years in order to focus on cross-border business. This has served to reduce the competitiveness of the US market and deliver “market advantage to incumbent players”, says Kading.

He adds that other potential responses to the tax include an increase in the purchase of non-affiliate reinsurance, resulting in demand chasing supply and driving the pricing of non-affiliate reinsurance up; the non-renewal of reinsurance, which would lead to reduced competition for US incumbents; and increasing levels of capital at US affiliates, with all the cost implications that brings.

Ultimately, the erosion of competition will affect US consumers, says Kading.

The bill is opposed by the CCIR and seven state insurance regulators, says Kading, but continues to face efforts by the Coalition for a Domestic Insurance Industry to introduce the measures.

“The Coalition for a Domestic Insurance Industry set out seven years ago to try to increase taxes on their foreign competitors to create an advantage for themselves. It remains a self-interested play that if successful will give them pricing power in the market and may eliminate some foreign competition”.

Kading says that the CCIR meanwhile continues to seek to educate parties on public policy and the potential impact of the bill on business and consumers. Superstorm Sandy—after which 50 percent of claims were met by foreign re/insurers—has been the “latest talking point” in the fight against the bill, says Kading, but he adds that it has been “discouraging that public policy arguments have been largely overlooked due to revenue issues”.

“Chairman Camp admits that introducing the tax would be bad public policy, but continues to include the tax because he needs to reach a revenue number.”

While Kading agrees that the development is “not an immediate threat”, he explains that as a ‘paid-for’, the reinsurance tax “has a revenue number attached and could therefore be tagged onto any piece of legislation that needs revenue to go with it”.