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Vermont becoming 'offshore' destination

US firms reaping tax breaks by setting up units to self-insure

At conferences of the offshore insurance industry, next to the booth for Bermuda, can often be found one promoting Vermont.

While that may seem strange for a chilly, landlocked state, Vermont is an offshore haven in one very real sense: It offers American companies lucrative tax breaks through unusual insurance arrangements.

More than 560 US firms, including Wal-Mart Stores, Starbucks, and McGraw-Hill, have set up Vermont-based wholly owned insurers -- called captives -- to cover their biggest risks and liabilities, giving them big tax benefits. Vermont now rivals the Cayman Islands and Bermuda as the insurance destination of choice for US firms.

Vermont's success in attracting captives also highlights the many ways that American corporations are allowed to minimize their tax bills by moving their profits, intellectual property or liabilities to places that provide substantial tax advantages, whether it is a Caribbean island, Ireland, or Singapore. And while many states in the United States provide tax breaks and subsidies to companies that move or expand operations in state, the benefits offered by Vermont are much larger.

Big financial services companies typically spend $25 million to $100 million a year on insurance coverage. Being insured through a captive cuts that cost for them by 5 percent to 20 percent, according to Nancy Gray of Aon Insurance Managers in Burlington, Vt.

Vermont has had laws allowing insurance captives since the early 1980s. But it was not until the late 1990s that the state began promoting itself as an alternative to traditional offshore insurance havens. The captive insurance industry, including insurers and the law firms that service them, is now one of the 10 biggest employers in the state.