Group cites trade violations for taxing reinsurers

In a letter to congressional tax writers, the Coalition for Competitive Insurance Rates on Monday warned that legislation denying a tax deduction for reinsurance premiums paid to offshore companies would violate international trade rules.

"[The bill] essentially imposes an isolationist tariff on international insurance companies conducting business in the U.S.," the letter states, adding, "[It] could spur retaliatory actions by other countries and ultimately damage relationships with important U.S. trading partners."

The letter argues the proposal breaks long-standing tax policy and also violates World Trade Organization rules that forbid a country from giving preferential treatment to a domestic company over a foreign-based competitor.

Rep. Richard Neal (D-Mass.) and Sen. Robert Menendez (D-N.J.) have championed the idea of preventing foreign-based companies from avoiding U.S. taxes by shifting reinsurance premiums offshore. The two argue that the strategy disadvantages domestic companies. 

The Coalition argues that by violating trade rules, the legislation will force foreign-based companies out of the U.S. insurance market, which will make it harder for domestic businesses to find coverage. 

"The effort to create a punitive tax regime on international carriers will result in less insurance capacity and increases costs for U.S. consumer," the group writes. "A robust insurance market open to as many competitors as possible is essential to consumers. This is particularly understood by those in states more exposed to natural disasters where there has been a crisis of insurance availability and affordability." 

The group states that insurance regulators in states hardest hit by natural disasters oppose the tax. Those states include Louisiana, Mississippi, North Carolina, South Carolina and Florida.

Taxing foreign reinsurers was recently proposed to help pay for the so-called tax extender bill. The measure would have replaced the tax increase on carried interest, over which senators from both parties have expressed concern. 

House leaders didn't include the measure in their legislation. But now the extender bill awaits action in the Senate, where it could be amended.