He has made lots of noise about closing tax loopholes. Does that mean Bermuda?
Barack Obama has a lot on his economic to-do list, but do the president-elect’s plans include raising taxes on offshore insurers? During his election campaign, Obama frequently mentioned closing corporate tax loopholes and ensuring that companies pay their fair share. His campaign ran a television advertisement that said: “John McCain went to Bermuda and, while he was there, pledged to protect tax breaks for American corporations that hide their profits offshore.” The US government is running the largest deficit since the second world war – a great incentive to increase tax revenues – and the increased Democratic majority in both houses of Congress will make it easier for the White House to push through change.
A bill that seeks to end the perceived advantage of offshore reinsurers over American companies is already before the House, introduced by Richard Neal, a Democratic congressman from Massachusetts, in September. The Neal bill, which would disallow deductions for premiums above an industry average paid to insurance companies not subject to US tax, is backed by a coalition of US-based insurers including WR Berkeley, Chubb and the Travelers Companies. These companies claim foreign-based insurers, such as ACE and XL Capital, avoid taxes on their US business by reinsuring policies written in the USA to Bermuda-based affiliates. This, they claim, gives the companies an unfair advantage.
Bermuda insurers see the Neal bill as protectionist. They reply that they already pay a 1% US federal excise tax on reinsurance transactions and a 35% tax on ceding commissions to the US affiliate for reimbursement of expenses. They also point out that any increase in tax would be passed on to customers in the US. Over the past six years, the Bermudian insurance industry paid $25bn (£16.9bn) in US property catastrophe claims, the largest share of any non-US market. While they do not pay tax in Bermuda, Bermudian reinsurers also cannot deduct losses. That results in the export from the US of losses that would otherwise be deductible against US tax. Bermuda insurers are privately hoping Obama isn’t too keen to move on this issue quickly.
Some are fearful that the topic provides an easy way for congressmen to score political points. Although the Bermudian insurance industry has grown because of the island’s fiscal policy, it is now a thriving market and a centre of expertise. For it to be damaged would be a loss for the worldwide insurance industry.
It would be a mistake to think Obama’s only concern about the insurance industry is how to extract more tax from it. He also supports a greater federal government role in disaster financing. The Homeowners’ Defense Act – proposed by two Democratic congressmen from Florida, Ron Klein and Tim Mahoney – would create a US national pool to fight high costs
of insurance for homeowners in hurricane-exposed areas. The idea of a federal backstop is opposed by many US insurers, who want a market-based solution, but supported by some, such as Allstate. Another idea Obama has backed is a tax on large corporations that do not offer health insurance to their employees.
It would be another mistake to think the Obama administration will be the only government looking hard for ways to increase tax revenue. European governments will be doing the same. And many of them will have the insurance industry in their sights.
â€¢ Offshore insurance could be targeted by the Obama administration.
â€¢ Clumsy measures could damage the reinsurance industry.
â€¢ Time will tell how high the topic is on the president's busy agenda.