WASHINGTON --Senate Finance Committee staff Wednesday sought comment on draft legislation that would tax related-party transactions by Bermuda-based insurance companies.
U.S. insurers including W.R. Berkeley Corp. (WRB), the Chubb Corp. (CB), and the Travelers Companies (TRV) have long charged that the Bermuda firms avoid taxes on their U.S. business by reinsuring the risk to the Bermuda parent.
The U.S. subsidiaries of firms including the ACE Group (ACE) and XL Capital Ltd. (XL) can then deduct the reinsurance premiums, lowering their U.S. tax liability. The Bermuda affiliate doesn't pay U.S. tax on the premium, while earning investment income subject to little or no tax.
"Thus, it is an efficient way of significantly reducing U.S. tax without transferring risk," according to a Finance Committee statement accompanying the draft legislation.
The Senate proposal would affect only related-party reinsurance transactions. It would deny a deduction for premiums in excess of an industry average of reinsured policies.
That approach is the same as the one taken in House legislation introduced in September by Rep. Richard Neal, D-Mass.
There is at least one minor difference - the Senate bill takes into account offshore income that is already subject to U.S. tax, to avoid over-inclusion of income, according to a committee staffer.
Groups representing foreign insurers say the proposal will have the effect of raising insurance rates for U.S. consumers.
"This legislation essentially imposes an isolationist tariff on international insurers conducting business in the U.S.," the Coalition for Competitive Insurance Rates wrote in a Nov. 17 letter to Senate Finance Committee Chairman Max Baucus, D-Mont., Neal and other lawmakers.
The Finance Committee will accept comments on the proposal until Feb. 28, 2009.
-By Martin Vaughan, Dow Jones Newswires; 202-862-9244; email@example.com