Dear Chairmen Brady and Hatch,
As the process of fixing America’s broken tax code advances, we commend your hard work and look forward to continuing to work together. It is in that spirit that we write to raise awareness about the potential for unintended consequences arising from one element of tax reform packages currently under discussion.
As you know, moving toward a territorial tax system is a key component of fundamentally reforming the tax code. As part of this process, several measures have been introduced that are intended to prevent gamesmanship that erodes the tax base. We are concerned that so-called “foreign affiliate” language might have the effect of making it more difficult and costly to secure protection from natural disasters, like hurricanes, by imposing new tax burdens on reinsurance coverage.
A basic principle of sound tax policy is that the law should be impartial with regard to marketplace outcomes. Under current proposals, reinsurance coverage purchased from foreign affiliates is taxed at a much higher rate than the same reinsurance obtained from domestic affiliates. This is a departure from current law, where the code is broadly neutral. In fact, there is already a modest preference favoring the purchase of reinsurance from domestic carriers, due to the existence of an excise tax on premiums paid to foreign reinsurers, including affiliate reinsurers.
The Treasury Department just this year said that including foreign affiliate reinsurance in base erosion measures “undermines the fundamental insurance principle of global risk diversification,” while the OECD has recognized it as legitimate risk transfer, as opposed to tax evasion, and thus refrained from imposing discriminatory treatment.
Neutral treatment of reinsurance purchases is not only the right tax policy, it also has clear benefits for consumers. The Tax Foundation has found that for every $1 in taxes raised through discriminatory treatment of foreign affiliate reinsurance, the economy would shrink by $4. According to a recent study from the Brattle Group, price competition derived from the tax-neutral, global availability of reinsurance will keep premiums $2.6 billion lower in Florida over the next decade, $620 million lower in Louisiana, and $3.35 billion lower in New York. In the latest hurricane season, the majority of insurance claims paid have come from foreign affiliate reinsurance, totaling nearly $40 billion (and climbing).
As applied to global insurance transactions, this provision raises very little revenue but threatens to do significant economic damage, all in pursuit of an unnecessary change to tax treatment that undermines the smooth operation of an industry that is by its nature global.
As you continue to fine tune the details of a territorial tax system and implement base erosion protections, we ask that you examine this issue and keep in place a neutral tax policy with regard to insurance transactions.