Scott Lohman, Managing Director
On July 30, 2009, Rep. Richard Neal (D - MA) introduced H.R. 3424, which would limit the deduction taken by a U.S. insurance company for non-taxed reinsurance premiums paid to foreign affiliates. The purpose of the bill is to address a concern that reinsurance is being used to shift profits from the United States to low-tax or no-tax jurisdictions, creating a competitive advantage for U.S. subsidiaries of foreign corporations.
A similar bill, H.R. 6969, was introduced by Neal in September 2008, but expired before the House took action on it. Some changes to that bill are included in H.R. 3424. Although largely the same bill that was introduced in 2008, H.R. 3424 does contain two changes to H.R. 6969.
First, the term “affiliated non-taxed reinsurance premium,” has been redefined to specify that the premium must be neither subpart F income (as defined in section 952) nor subject to tax for the affiliated corporation. In H.R. 6969, the definition included an exclusion of premiums paid to a “controlled foreign corporation.”
The second, more substantial, difference adds to the allowance in H.R. 6969 for a foreign affiliate to elect to be treated as a domestic insurance company the ability to also treat specified reinsurance income as connected with the conduct of U.S. trade or business. The income permitted to be so treated includes “affiliated non-taxed reinsurance premiums” received directly or indirect from insurance companies to which the foreign reinsurer is affiliated, as well as net investment income.
Under the terms of the bill, the foreign affiliate must meet several requirements:
- Qualify as an insurance company for federal income tax purposes
- Waive all foreign tax treaty benefits with respect to specified reinsurance income to which the election applies
- Meet any additional Treasury Department requirements
As the bill presents essentially the same proposal as introduced in 2008, the same arguments both for and against the issue are likely to be reiterated as H.R. 3424 makes its way through the legislative process.