Even with debt, US not closing offshore loophole

Neal says bill could raise $1.7b per year

By Christopher Rowland
Globe Staff / July 27, 2011

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WASHINGTON - US Representative Richard Neal has been thwarted for years in his effort to stop foreign insurance companies from shifting premiums paid by their US customers to offshore tax havens.

This week, it became clear that the Springfield Democrat will be frustrated once again, as Democrats and Republicans in Congress have left tax code changes out of their competing plans to raise the debt limit.

While much of the nation’s attention has been riveted on the determination of fiscal conservatives in the House to block any provision that raises new revenue, Neal’s unsuccessful effort to close what he calls an offshore tax loophole is an example of how business interests have stymied an array of tax code changes sought by President Obama, Democrats, and even some Republicans in the Senate.

“It’s the lobbying muscle,’’ Neal said. “Once something becomes embedded in the tax code, its very hard to extract.’’

Coincidentally, the aftermath of the tornadoes that tore through Western Massachusetts last month, causing an estimated $200 million in damage, offers a peek at the particular strategy on some insurance premiums that Neal and others say is unfair to US taxpayers.

Many of the storm damage claims in Westfield, Springfield, and Monson will be paid by overseas reinsurance firms, most with large operations in the United States and headquarters in Bermuda and Switzerland. The foreign reinsurance companies are not required to pay federal income taxes on the estimated $30 billion a year they shift from American subsidiaries to their offshore affiliates.

“It’s sophisticated tax avoidance,’’ said Neal, who serves on the House Ways and Means Committee, which has jurisdiction over tax matters. “Their presence is in the United States. Their post office box is offshore.’’

Tax specialists say it is just one example of the ways corporations legally move income from the United States to offshore accounts - and out of range of the IRS. The Congressional Research Service, a nonpartisan arm of the federal government, estimated last year that such shifting costs US taxpayers as much as $60 billion a year in lost revenue.

“It’s an example of a broader issue,’’ said Bret Wells, a professor and international tax law specialist at the University of Houston Law Center. Unless such practices are stopped, he said, more American companies will join the trend.

Offshore reinsurance companies say taking away the deductions on transfers would violate international trade agreements and lead to higher rates for homeowners and businesses.

An industry-backed group, the Coalition for Competitive Insurance Rates, commissioned a report that contends US homeowners and business operators, especially those in coastal areas from the Gulf of Mexico to New England, would face rate increases of more than 2 percent if the Neal legislation passed, an $11 billion to $13 billion impact on consumers.

Offshore reinsurers would flee the US market, and that would limit supply and drive up the price of insurance, while eliminating any taxes that advocates believe would be collected, said the report’s author, Michael Cragg of the Brattle Group, a Cambridge consulting firm.

“That is going to essentially tax away all of the profit that would allow them to do business in the United States,’’ Cragg said. “There is no economic incentive for them to do business in the US.’’ Furthermore, the companies already pay a share of taxes on US profits, before they take deductions related to offshore transfers, he said.

Others say the effect of the tax on premium pricing would not be significant.

The Neal legislation and White House budget provision would have little impact on the huge reserves of capital overseas, said Laline Carvalho, an independent credit ratings analyst and reinsurance market expert who works for Standard & Poor’s. The effect on premiums paid by consumers would be minor, she added, emphasizing that she was not responding directly to industry claims.

“Their interest in the US market will not change. The US is the largest reinsurance market in the world,’’ she said.

Companies with foreign headquarters now dominate the global reinsurance market, reflecting a shift away from US shores that began in the 1990s and picked up steam after the Sept. 11, 2001, terrorist attacks and Hurricane Katrina in 2005.

Those disasters fueled demand for deep capital reserves to cover insurance losses. Reinsurance companies flocked to Bermuda, in particular, where regulatory hurdles to opening a company were low.

Several US companies transformed themselves into foreign corporations by changing their home base to Bermuda. In other cases, foreign companies purchased US firms.

Through a variety of strategies, many US corporations pay nothing close to America’s 35 percent corporate tax rate. But offshore reinsurance companies typically report lower tax burdens than domestic firms in the same business, specialists on both sides agree.

One of the largest overseas reinsurance companies, Bermuda-based Everest Reinsurance Holdings Inc., reported that it had no US income taxes to pay in 2010. Everest representatives did not respond to telephone messages. Another, Arch Capital Group, reported effective total income taxes - US and other countries combined - of just 0.9 percent in 2010. Arch declined to comment.

Neal’s fight has been joined by Obama, who inserted a less aggressive version of the legislation into his proposed 2012 budget. If approved, the Obama measure would raise about $1 billion a year in new taxes. Neal’s bill would have raised about $1.7 billion a year, according to government estimates.

The provisions would curb the ability of these reinsurance companies to deduct as a business expense the money they shift from US subsidiaries to offshore accounts. Closing the deduction is supported by a group of domestic insurers, including Boston-based Liberty Mutual Insurance Co.

“All we’re trying to do is level the playing field,’’ said Jonathan Talisman, a former deputy treasury secretary retained as a lobbyist by the domestic insurers. Offshore companies, he said, “want to serve the US market, they just don’t want to pay US tax on serving it.’’

Christopher Rowland can be reached at crowland