Reinsurance is just tax avoidance by any other name

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There's a big row brewing in the US. Tax-News.com (not a regular source here) has covered the issue in depth. It concerns a bill attacking the practices of offshore insurers currently before the House of Representatives. A group called the Coalition for the Domestic Insurance Industry (CDII), which represents US-based insurance groups, has released its own defence of the legislation which is aimed at ending  “the use of excessive affiliate reinsurance by foreign insurance groups to strip their US income into tax havens, avoid tax, and gain a competitive advantage over American companies.”

As Richard E Neal,  Chairman of the Subcommittee on Select Revenue Measures is reported to have said:

The benefits of being headquartered in a tax haven can be quite significant for a company with investment income over long periods of time. Use of affiliate reinsurance allows foreign-based companies to shift their US reserves and their investment income overseas into tax havens, thereby avoiding US tax.

But the offshore guys, grouped as the  Coalition for Competitive Insurance Rates have called this punitive saying since the legislation solely targets non-US companies it is discriminatory in nature and creates an anti-competitive environment for companies who wish to invest in the US insurance market. Unsurprisingly, and completely correctly, the CDII does not agree. It reiterated that reinsurance transactions with affiliates do not add additional capacity to the market, as had been claimed by the foreign insurers; “they simply allow foreign-owned insurers to strip profits overseas into tax havens to avoid paying their fair share of US taxes.”

And it adds that the legislation will benefit consumers. “It will recapture an estimated USD17bn in revenue for the Treasury,” it said. “At a time of burgeoning federal deficits, and as American consumers and businesses face tax increases, it is wrong to allow foreign-owned insurers to avoid US taxes on their US-based business.”

Absolutely. This is one the domestic guys have to win. Offshore reinsurance is simply tax abuse. There’s no other reason for it. And it has to go, for precisely that reason.