As lawmakers launch the first serious effort to achieve comprehensive tax reform in three decades, one consistent challenge persists: how to pay for the heart of the effort, which is lower tax rates. In comprehensive reform, every dollar counts.
One revenue raiser, which is supported by a broad group of U.S.-based insurance companies, is a win-win for Americans and American-based businesses. It would close an obscure tax loophole that solely benefits foreign-controlled insurance companies and not the American taxpayer.
The Insurance Tax Haven loophole is used by foreign-controlled insurers to escape paying U.S. taxes. It allows them to use a maneuver, known as affiliate reinsurance, to avoid billions in U.S. taxes by moving much of the income they generate from writing U.S. insurance policies to overseas tax havens. These foreign-controlled insurers shift this income by purchasing reinsurance from offshoots of their own companies, their so-called reinsurance affiliates.
The offshore reinsurance affiliates are taxed at a low or zero rate on this U.S.-generated income. Meanwhile, U.S.-headquartered insurance groups must pay full federal taxes in the same circumstance. In effect, these foreign-controlled companies are doing business with themselves to avoid paying billions of dollars in taxes on their U.S. profits.
Indeed, the loophole has been referred to as the insurance industry’s “Bermuda Triangle,” because many companies have moved their headquarters to places like Bermuda to make their U.S. taxes disappear.
The loophole gives foreign-owned companies a significant competitive edge in raising capital, which these companies have used, ironically, to buy American insurance companies or divisions of American companies. To add insult to injury, many of these foreign-insurance companies were originally American-based and either moved their headquarters overseas for tax purposes or were acquired by foreign companies to take advantage of this loophole.
The facts show the migration offshore; in 1989, of the top 15 reinsurers writing U.S. business, 85 percent of the premium was from American-based reinsurers. In 2015, the premium from American-based reinsurers dropped to just 27 percent, all caused by this tax loophole. If nothing is done to close the affiliate reinsurance loophole, we should expect that similar migration will continue into our primary domestic insurance industry.
The loophole must be closed to eliminate preferential tax treatment of foreign companies over U.S. companies. Doing so would generate nearly $9 billion in revenue over 10 years to help pay for comprehensive tax reform and prevent further erosion of the U.S. tax base.
In addition, the elimination of the loophole would slow the movement of U.S. insurance companies and lines of business overseas. Its very existence incentivizes and helps to finance the relocation of insurance companies to foreign locales.
Proposals to close the loophole are not new. Both the George W. Bush and the Obama administrations supported closing the loophole. Democratic and Republican chairmen of the congressional tax-writing committees have offered similar proposals as well. It’s important to note that these proposals wouldn’t impose a new tax. Rather, they would ensure that existing taxes are paid by both foreign and U.S.-based insurance companies that operate in the U.S market. Such a fix is consistent with international trade agreements and tax treaties.
Closing the Insurance Tax Haven loophole would not affect legitimate third-party reinsurance, which is the normal mechanism used to spread risk among unrelated parties, and in that way increases capacity in the domestic insurance market and keeps insurance rates low. The target of any effort to close the loophole is related-party reinsurance, which is increasingly used to avoid tax liabilities and does nothing to expand insurance capacity in the market.
U.S.-based insurers provide financial security for millions of Americans, as well as hundreds of thousands of good paying jobs. Congress and President Donald Trump should close this unfair loophole because it favors foreign-owned property and casualty insurance companies at the expense of American insurance companies and the U.S. taxpayer.
Doing so will help sustain a healthy domestic insurance market by ending an incentive for American companies to move overseas, prevent further erosion of the U.S. tax base and preserve the third-party reinsurance market that enables U.S. insurers to provide financial stability and risk-management for millions of U.S. consumers and businesses.
William R. Berkley is the executive chairman of W. R. Berkley Corp., a member of the Coalition for American Insurance.
Correction: A previous version of this opinion piece misspelled the author’s name.
Morning Consult welcomes op-ed submissions on policy, politics and business strategy in our coverage areas. Updated submission guidelines can be found here.
Get the latest global financial news and analysis delivered to your inbox every morning.