CEA voices concerns over Neal Bill

The CEA has submitted a written statement to the US House of Representatives Subcommittee to express its concerns over proposals to change the US tax treatment of reinsurance between affiliated entities

Bill HR 3424, introduced in the US House of Representatives on 30 July 2009 by Representative Richard Neal, contains a provision to deny a tax deduction for reinsurance premiums to related foreign entities that exceed an industry average. The US Administration's 2011 budget proposal would similarly deny deductions for certain reinsurance premiums paid to related foreign reinsurance companies.

"The CEA believes that substantial unintended and negative consequences would result from the implementation of such proposals and has written to the US House of Representatives Select Revenue Measures Subcommittee with its concerns," said Tommy Persson, president of the CEA.

According to the letter, disallowing the tax deduction for reinsurance between affiliated entities would have a detrimental effect on US consumers as it would lead to higher insurance premiums, due to the higher costs that would be placed on foreign and foreign-controlled (re)insurers doing business in the US. These (re)insurers supply 15% of the direct insurance and 50% of the reinsurance accepted in the US. Making the placement of reinsurance with affiliates more costly would also reduce the ability of (re)insurers to diversify their risks and would thus reduce insurance capacity, in particular for low frequency, high exposure catastrophe risks.

"EU reinsurers face an average tax burden of 25%, so the argument that the existing tax deduction could create incentives to reinsure more than would otherwise occur between unrelated entities does not hold true," said Mr Persson. "The proposals would also lead to taxation in both the US and the reinsurer's country of origin, thereby violating US double tax treaties."

Furthermore, US law already includes adequate tools to deal with "income shifting" from US insurance subsidiaries to foreign affiliate reinsurers. The transfer pricing rules of the US Internal Revenue Code mean that no further measures are required to prevent tax evasion.

Lastly, since the proposals are only applicable to foreign, not US, reinsurers, the CEA believes they could contravene the US G-20 commitment to avoid protectionism and its World Trade Organization (WTO) commitments under the General Agreement on Trade in Services (GATS).

"We strongly urge US legislators to recognise the detrimental effects on US consumers and the US insurance market and to abandon the proposals," said Mr Persson.