On December 10, 2008, the Senate Finance Committee (the “Committee”) held a meeting to discuss proposed legislation (the “Proposal”) that would reduce the purported competitive advantage in tax treatment received by affiliated foreign reinsurers by altering the tax code to disallow deductions for a portion of reinsurance premiums ceded by insurance companies to affiliated foreign reinsurers who are not subject to U.S. taxation.  The legislation is substantially similar to a bill (H.R. 6969) introduced by Representative Richard Neal (D- Mass.) in September 2008.  Click here to read our post on Rep. Neal’s measure, which is currently with the House Committee on Ways and Means.

Under the Proposal, ceding insurers would be denied a deduction for “any premiums reinsured in excess of the industry average of reinsured policies.”  Currently, the tax code provides for a 1% excise tax on premiums paid to foreign reinsurers (affiliate or non-affiliate), and deductions for all reinsurance premiums paid.  The deductions allow a ceding insurer to reduce its U.S. taxable income, and at the same time an affiliated foreign reinsurer located in certain jurisdictions does not have to pay U.S. taxes on the investment income generated from the ceded policies due to various international treaties.  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.  Backers of the Proposal contend that limiting the available deduction to ceding insurers will keep excess reinsurance premiums paid to affiliated reinsurers within the purview of U.S. taxation.

The Committee has posted a copy of draft legislation on its website for public comment.  The deadline for submitting comments on the potential impact of the Proposal is February 28, 2009.