American insurance companies came to the Hill Wednesday to complain about a tax-avoidance strategy that they say is giving Bermuda-based insurance companies an unfair competitive advantage. The general idea is that an insurance company can locate or relocate in Bermuda, which has a tax treaty with the United States allowing premiums paid to Bermuda-based insurers by U.S. customers to be free of U.S. tax, except for a 1 percent excise tax. The company's U.S. affiliate sells insurance to U.S. customers and then buys reinsurance (which is common for insurers) from the parent in Bermuda, so that income from premiums is effectively shifted to Bermuda where it can be invested tax-free.
In reality the affiliates are operating as one company just shifting money around on paper. The strategy apparently requires very little in the way of actual employees of facilities physically located in Bermuda.
A U.S.-based insurer will generally pay the corporate tax rate of 35 percent on its income, and thus is put at a competitive disadvantage relative to the Bermuda-based insurer. The strategy available to the Bermuda-based insurers should be eliminated for moral reasons, but thankfully there are some powerful U.S.-based insurers that have found it in their own interest to start lobbying for reform.
While some members of the Finance Committee have expressed concern and an interest in a legislative solution, no proposal has been made public yet. The Bermuda-based companies have formed their own lobbying coalition to block reform.