President Barack Obama’s recently released proposed Budget of the U.S. Government for the Fiscal Year 2011 (the “Proposed 2011 Budget”) would disallow the deduction for excess non-taxed reinsurance premiums paid to foreign affiliates by a U.S. insurance company. The Proposed 2011 Budget projects that this disallowance would result in tax receipts of $22 million in 2011, and totaling $223 million over the next five years.

The current deductions allow a ceding U.S. insurer to reduce its U.S. taxable income, while at the same time an affiliated foreign reinsurer located in certain jurisdictions does not have to pay U.S. taxes on the premium income generated from the ceded policies. Thus, the total U.S. taxes paid by the ceding insurer and affiliated foreign reinsurer are reduced while keeping all of the risk within the affiliated companies.

As we have previously noted in our blog posts on this topic here, here and here, proponents for the elimination of this deduction contend that offshore companies are provided an unfair tax advantage and that the lack of equal footing results in the migration of capital abroad. Opponents of the elimination of this deduction argue that elimination is akin to a protectionist tariff and although U.S.-based reinsurers would sell more reinsurance, much reinsurance would simply vanish due to increased rates and reduced coverage.