Taxing of Reinsurance Between Affiliated Entities on July 14 Agenda for U.S. House Ways and Means Subcommittee
Jul 13, 2010
The U.S. House Ways and Means Select Revenue Measures Subcommittee (“Subcommittee”) will hold a hearing on the issue of taxation of reinsurance between affiliated entities tomorrow, July 14, 2010 at 10:00 a.m.
To view a live Webcast of the hearing, click here.
In addition to the issue of reinsurance between affiliated entities the hearing will also allow for consideration of recent proposals that would impact certain reinsurance premiums paid to related foreign entities.
Background (as provided by the Subcommittee):
Because of the unique nature of their business, the Internal Revenue Code provides special rules for the taxation of insurance companies. Taxable income of property and casualty insurance companies consists of the sum of underwriting income and income from investments reduced by allowable deductions. A property and casualty insurance company may deduct the amount of premiums paid for reinsurance, in which the insurance company transfers a portion of the risk to another company.
In 1984, Congress became concerned that tax avoidance or evasion was possible through reinsurance with related parties and enacted a rule allowing Treasury to reallocate, adjust, or recharacterize certain payments, credits, or deductions among related parties (26 USC §845). In 2004, expressing concern that “foreign related party reinsurance arrangements may be a technique for eroding the U.S. tax base,” this provision was expanded by Congress to allow Treasury to adjust the “amount” and not just the source or character of items (the “American Jobs Creation Act of 2004,” P. L. 108-357, Section 803).
Additionally, an excise tax applies on a gross basis to premiums paid to foreign insurers and reinsurers of US risks, at four percent for property and casualty insurance premiums and one percent for reinsurance and life insurance premiums (26 USC §4371); however, this may be waived by treaty.
President Obama’s Fiscal Year 2011 budget proposal contains a provision to deny a deduction for reinsurance premiums paid to related foreign reinsurance companies if the related foreign entity was not subject to U.S. tax with respect to those premiums and the amount of the premiums (less ceding commissions) exceeds 50 percent of the total direct insurance premiums received by the U.S. company and its U.S. affiliates for a line of business. Alternatively, a foreign corporation could elect to treat those premiums and the associated investment income as effectively connected U.S. income.
The budget document cited concerns that the tax advantages from related party foreign reinsurance could create incentives to reinsure more than would occur between unrelated parties acting at arm’s length.
Similarly, Subcommittee Chairman Richard E. Neal (D-MA) has filed legislation (H.R. 3424) to deny deductions for reinsurance premiums to related foreign parties that exceed an industry average by line of business.
In announcing the hearing, Chairman Neal stated, “Monitoring transactions between related parties is always a difficult task but even more so when insurance is involved. I look forward to hearing the testimony from experts who will inform our understanding of the industry and relevant tax laws.”
- While oral testimony at this hearing will be limited to invited witnesses, any individual or organization not scheduled for an oral appearance may submit a written statement for consideration and inclusion in the hearing’s printed record. Written comments will be accepted until July 28, 2010.
Subcommitte Instructions for Submission of Written Comments
- Note: For complete instructions on format and documentation, click here.
Any person(s) and/or organization(s) wishing to submit for the hearing record must follow the appropriate link on the hearing page of the Committee website and complete the informational forms. From the Committee homepage, go to http://waysandmeans.house.gov and select “Hearings.”
Then select the hearing for which comments are to be submitted and click on the link entitled, “Click here to provide a submission for the record.”
Attach the submission as a Word or WordPerfect document, in compliance with the formatting requirements listed below, by close of business Wednesday, July 28, 2010.
Finally, please note that due to the change in House mail policy, the U.S. Capitol Police will refuse sealed-package deliveries to all House Office Buildings. For questions, or if you encounter technical problems, please call (202) 225-1721 or (202) 225-3625.
Should you have any questions or comments, please contact Colodny Fass.