Obama Tax Plan Would Go After Offshore Operations

National Underwriter News
May 4, 2009

WASHINGTON -- The major impact on insurers from an offshore tax avoidance crackdown announced today by the Obama administration appears to be a proposal restricting a deduction of costs for financing foreign operations, according to industry sources.

Joe Sieverling, a senior vice president at the Reinsurance Association of America, and George Burke, a spokesman for the American Council of Life Insurers, both said the tax deferral component of the administration's plan appears likely to have the most impact on insurers.

But both said the impact will vary from company to company, obviously based on the extent of foreign operations an insurer conducts.

At the same time, Mr. Sieverling cautioned that the administration made clear in comments today that further international tax proposals will be forthcoming later this month, so it is too early to tell if any proposals specific to the insurance industry lie ahead.

But, he noted in the comments and a fact sheet made today, the administration made no mention of the legislation closing a tax loophole expected to be introduced later this month by Rep. Richard Neal, D-Mass., chairman of the powerful Select Revenue Measures Subcommittee of the House Ways and Means Committee.

The Neal bill will target certain excessive reinsurance transactions that domestic insurers say are used by offshore insurers with U.S. operations to reduce their U.S. tax bill.

This involves ceding premiums of the U.S. unit of a foreign insurer to the offshore reinsurance unit of the company.

The proposals unveiled today by President Obama and Treasury Secretary Timothy Geithner are aimed at reducing the decision by U.S. multinationals to keep their foreign earnings offshore indefinitely.

Washington Analysis, a Washington-based firm which advisers institutions and hedge funds, cautions that the proposal released by the administration today was far less comprehensive than expected, and that it is unlikely to be implemented for tax years before 2011.

"The proposal laid out this morning raises $60.1 billion over ten years," the analysts aid. "In other words, it is much less severe than what was possible or perhaps feared," the analysts said, noting that the "retreat likely reflects the significant corporate backlash against the initial proposal."

The analysis also noted that any changes in corporate taxes that did arise this year would likely arise as pay-as-you-go offsets designed to pay for specific legislative initiatives such as energy or health care bills.

"We expect such offsets will be fairly narrow in nature, such as targeting large oil and gas producers, and not nearly as sweeping as those detailed this morning," the investment note said. "We put odds at under 50 percent that the types of proposals clarified this morning will be used as PAYGO offsets this year," the note added.

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