Bermuda Tax Proposals: ‘Closing a Loophole’ or ‘ Pork Barrel Polics”

The taxation of foreign insurers, reinsurers, captives banks and financial service providers, involves some very complex international issues, heavily charged with “political considerations.” HR 4192, or the Johnson/Neal Bill, aims at ending “favorable tax treatment” for foreign-based insurers, principally those located in Bermuda. Though there is little chance of the bill’s passage in this Congress, it is likely to be resurrected in the next one.

The Johnson/Neal proposal addresses only one aspect, income taxation, but it could have a larger impact.

Bermuda imposes no direct corporate tax based on revenues; therefore, companies operating there pay less tax on their global earnings. By contrast, the current basic tax on corporate net income in the U.S. is 35 percent. According to the proponents of Johnson/Neal, this gives “foreign” companies headquartered in places like Bermuda an unfair tax advantage, as they pay only a 1-percent “excise fee.”

The bill’s proponents argue that insurers like ACE, XL, Overseas Partners and more recent arrivals in Bermuda are using the island as a tax haven in order to
avoid corporate income tax payments. Congresswoman Nancy Johnson (R-Conn) stated that this “not only deprives our country of tax revenues, but it gives foreign companies an unfair advantage over U.S. owned companies and their workers.”

HR 4192—co-authored with Richard Neal (D-Mass) and Robert Matsui (D-Calif) and introduced last April—was presented as a way to close this “tax loophole.” It recognized that insurers earn money from investments, not premiums, which usually don’t equal the amount of claims. When a U.S. subsidiary “reinsures” with its Bermuda-based parent, the funds are invested from outside the U.S., and earnings on them aren’t subject to U.S. tax.

The Johnson/Neal bill would require all companies writing insurance in the U.S. to pay U.S. tax on imputed investment income when premiums are sent to countries that have a corporate income tax rate less than 20 percent of the U.S. rate. Alternatively, reinsurers with ties to U.S. companies, a number of whom operate from Bermuda, could elect to pay only an amount equivalent to that portion of their business attributable to U.S. activities.

Although the IRS disallows deductions for premium payments made to foreign captives, maintaining they’re basically going from one pocket to another, no one contends that the income tax situation is analogous. The Bermuda companies comply with current U.S. law in all respects.

HR 4192 has therefore met with a lot of opposition. The Bermuda International Business Association released a statement: “The legislation introduced in the U.S. Congress by Johnson, Neal and Matsui appears to be a protectionist measure, backed by some U.S. insurers, which BIBA regards as an attack on our jurisdiction as a whole and not just the insurance industry here.”

ACE Ltd. was even more forceful, calling the Johnson/Neal legislation “pork barrel politics at its worst.” “It would favor a few Northeastern U.S. insurance companies, but jeopardize the ability of the industry to meet the capacity needs of the domestic market, particularly with respect to coverage for hurricanes, floods and other natural disasters,” said a company announcement.

Both sides present relatively logical arguments, and possibly some deeper concerns. It’s no secret that two large “Northeastern insurance companies,” namely Chubb Corp. and The Hartford Group, did initiate the lobbying efforts that resulted in HR 4192. In one of the year’s best tautologies, Hartford Vice President Joel Freedman stated, “Since Bermuda has a zero tax, it’s a tax haven, and there’s a favorable tax advantage.”

Bridge Information Systems reported in January that, “Representatives of some of the companies, including Chubb, have met with the Senate Finance Committee chairman’s staff as well as Treasury Department officials.” It also reported that Chubb CEO Dean O’Hare and the Hartford’s Ramani Ayer attended a meeting at New York’s Waldorf-Astoria Hotel, where they discussed with other insurance company CEOs the “issue of tax advantages enjoyed by offshore companies that do business in the U.S.” Stepped-up lobbying efforts followed. Liberty Mutual and Chicago’s Kemper Group, a unit of Zurich Financial, joined Chubb and Hartford in backing the tax proposals. Their combined efforts convinced Rep. Johnson and her colleagues to introduce their bill.

The timing wasn’t coincidental. ACE’s acquisition of Cigna’s personal lines business, XL’s acquisition of NAC Re, and the planned relocation to Bermuda of at least four other insurers, focused the industry’s attention on the fact that in the electronic age Hamilton is just as likely a place to do business from as Hartford, Conn., or Warren, N.J.

The realization that they faced heightened competition from some well-capitalized and highly organized “foreign” insurance companies spurred Hartford, Chubb and the others to take action.

The dispute goes beyond tax considerations. Bermuda has become more than simply a tax haven—most insurers have business operations there. Chubb operates Chubb Atlantic Indemnity Ltd.; Kemper owns Dallas Management Company, and Liberty’s global risk management subsidiary is known simply as “Bermuda Operations.” All are well-established and profitable units of their parent companies.

The real problem is the increasingly tight global insurance market. Any edge, such as not having to pay income tax on your investment gains, gives one’s competitors an advantage. Bermuda’s insurers are actively seeking a greater share of the U.S. market, especially for corporate business, and they can offer rates and services that domestic providers find hard to match.

Roger Scotton, XL corporate communications director, points out that Bermuda’s real attraction to insurance companies is not the tax advantages available, but the flexibility the island’s statutes offer insurers. “Freedom from rate controls and the ability to create our own policy language, that’s what’s important,” Scotton said. “The regulators don’t tell us what rates to use or what policy language we have to adopt. There’s $52 billion in capital in Bermuda, and it’s certainly not all tax driven.”

With that kind of backing, no change in the tax law is going to fundamentally affect the business written in the U.S. by Bermuda-based companies. Even if the Johnson/Neal Bill is eventually passed in some form, it may not have the effect its proponents are looking for.

Topics Carriers USA Profit Loss Chubb