On February 14, President Obama released his proposed federal budget for 2012. The budget includes many proposals intended to increase revenue to the United States. Among these plans is a proposal to disallow the deduction for non-taxed reinsurance premiums paid to certain foreign affiliates. According to the Treasury Department, this proposal would (1) deny an insurance company a deduction for reinsurance premiums paid to affiliated foreign reinsurance companies to the extent that the foreign reinsurer (or its parent company) is not subject to U.S. income tax with respect to the premiums received; and (2) would exclude from the domestic insurance company’s income (in the same proportion that the premium deduction was denied) any ceding commissions received or reinsurance recovered with respect to reinsurance policies for which a premium deduction is wholly or partially denied. The proposal would be effective for policies issued after December 31, 2011.
The effect of the proposal will be a higher tax burden in the United States for foreign insurance groups that have affiliates that operate in the United States and which cede risks to their foreign affiliates. Currently, some foreign-owned groups conduct business in the United States through their affiliates. These affiliates then use reinsurance contracts with the foreign-owned parent, which can have the effect of reducing the domestic entity’s tax burden through the deduction that is currently permitted. There is usually no offset in tax paid to the United States due to an increased tax burden of the foreign parent since the foreign parent company is usually not engaged in business in the United States and is not subject to U.S. tax on its income. According to the proposed budget figures, the proposal would reduce the deficit by $1,103,000,000 from 2012-2016 and $2,614,000,000 from 2012-2021. This proposal is similar to the so-called Neal Bill, which had been proposed by Congressman Richard Neal of Massachusetts in the summer of 2010, as well as various other prior similar legislative efforts. A bill would have to be introduced as new legislation and pass in both chambers in order for the proposal to take effect.