NU Online News Service, Oct. 13, 2:5400 p.m. EDT

WASHINGTON—Legislation designed to close a tax loophole that benefits property and casualty insurers based offshore has been reintroduced in the House and Senate.

The revised bill (H.R. 3157 and S. 1693) has been crafted to defer the deduction for reinsurance premiums paid to a foreign affiliate if the premium is not subject to U.S. tax.

Under the revised law, foreign-based insurers will not be disadvantaged as the legislation allows them to elect to be taxed similarly to a U.S. company on the income from affiliate reinsurance transactions.

The legislation also allows for a tax credit to offset any foreign taxes paid on such income to prevent double taxation.

However, the revised bill appears to reduce or end the impact on reinsurance by exempting third-party insurance, thereby exempting catastrophe reinsurance purchased by entities created by the states to reduce the cost of homeowners' coverage in coastal states.

The bill was revised with the help of tax experts and the Treasury Department to address concerns raised by prior iterations of the legislation while still effectively closing this loophole and restoring what domestic insurer supporters call “a level playing field.”

The bill was introduced by Rep. Richard E. Neal, D-Mass., ranking member of the House Ways and Means Select Revenue Subcommittee, and Sen. Robert Menendez, D-N.J., a member of the Senate Finance Committee.

Neal's original bill would have disallowed a deduction for “excess non-taxed reinsurance premiums” paid by the U.S. units of offshore insurers to offshore reinsurance affiliates. It was projected to raise $17 billion over 10 years, $5 billion more than the revised bill.

It is different than the proposal in President Obama's budget for the past two years that would deny any deduction for reinsurance ceded to a foreign affiliate or its parent to the extent that the foreign parent is not subject to U.S. income taxation on the premium. It would also impose other changes in current tax policy to raise revenues from this source.

The administration's previous proposal, for the fiscal year that would have started Oct. 1, was projected to raise $2.6 billion over 10 years.

The budget proposed for the 2011 fiscal year would have raised $519 million in additional revenue.

Trade groups created by both sides immediately took the opportunity to renew their public-relations battle over the issue, which has been debated off and on in Washington, D.C. for more than 10 years.

Supporters of the legislation say the revised bill is consistent with tax-treaty and trade obligations.

“Because the legislation does not impact third-party reinsurance, it would have no impact on the cost or availability of insurance, including catastrophe coverage in coastal states,” according to William R. Berkley, chairman and CEO of W.R. Berkley Corp. and head of the Coalition for a Domestic Insurance Industry, a group created to generate support for the bill.

The Coalition for Competitive Insurance Rates, a lobbying group supported by foreign insurers, immediately sent out a statement criticizing the bill.

“The choice to single out foreign-based insurers and reinsurers is a particularly bad one at a time when we are looking to create jobs in the U.S.,” says Nancy McLernon, president and CEO of the Organization for International Investment, in Washington, in the statement.

She says the bill “sends an unfortunate, but clear message to global companies that they cannot count on being treated in a fair and equitable fashion when doing business here.”

Eli Lehrer, an expert on catastrophe and flood issues with the Heartland Institute in Washington, notes, “Everyone is looking for revenue raisers and, certainly, the sponsors are hoping for attention from the [Joint Select Committee].

He adds, “I wouldn't expect the legislation to pass but, certainly, it has some legs.”

Lehrer explains that narrowly focused revenue provisions always have a better chance than broad ones.

“And this, although an attack on American consumers, is just the sort of narrow provision that someone might be able to sneak in during the dead of night,” Lehrer says.

Ray Lehmann, deputy director of the Heartland Institute's Center on Finance, Insurance, and Real Estate, says: “These are protectionist measures that would reduce insurance capacity for U.S. policyholders and raise rates for many insurance consumers. In addition, [the law] would have the effect of concentrating more risk domestically, rather than seeing it spread throughout the global insurance and reinsurance markets.”

The legislation was reintroduced in hopes that the estimated $12 billion over 10 years it would generate in additional tax revenue would pique the interest of the Joint Select Committee.

That so-called “super-committee” is trying to produce a debt-reduction plan aimed at forestalling as much as $1.2 trillion in across-the-board cuts that would kick in—evenly divided between defense and non-defense spending—if the legislation fails.

The committee will have until Nov. 23 to propose ways to reduce deficits. Those proposals must be voted on by Congress by Dec. 23.