With the US presidential election less than two weeks away, many in the insurance and reinsurance industry — the largest sector of Bermuda’s economy — will be watching the results closely.That’s because the outcome of the election could very well determine the fate of proposed legislation that would impose a costly tax on all non-US re/insurance companies who write business there.Right now, nearly two-thirds of all reinsurance coverage required to protect American homes and businesses is provided by non-US reinsurance companies. In Florida, only nine percent of the reinsurance comes from American companies with the rest coming from non-US companies — 62 percent of them are Bermuda-based.US Congressman, Richard Neal, a Democrat from Massachusetts, and Senator Robert Menéndez, a Democrat from New Jersey, have teamed up on legislation that would cap the amount of reinsurance premiums US insurance companies could pay to international companies.Congressman Neal has touted his legislation as a way to “stop outsourcing”, close tax loopholes and stop American companies from hiding profits in “countries like Bermuda”. In a recent campaign ad, Rep Neal claimed that all companies need is a Bermuda post office box to avoid paying US taxes.Re/insurance Companies vs Multinational CorporationsOpponents of the legislation say Congressman Neal confuses the issue — lumping in re/insurance companies that employ thousands of people in Bermuda and the US with multinational corporations here purely for tax avoidance purposes and have little to no presence on the Island.At an average of 39.2 percent (with both federal and state rates included) the US has the highest corporate tax rate in the world. Several US multinational corporations like Google, Apple, Starbucks and most recently, eBay, have been in the news recently for paying US taxes on their US profits, but not on profits made outside the country. The companies claim those profits in countries where the corporate taxes are much lower, like Ireland (12.5 percent), the Netherlands (25.5 percent), Switzerland (21.17 percent) and Bermuda (0). But the re/insurance companies Rep Neal’s bill targets actually have employees here and are set up in Bermuda for reasons other than pure tax avoidance.Brad Kading, president and executive director of the Association of Bermuda Insurers and Reinsurers (ABIR), which represents 22 major international re/insurers, has been lobbying on Capitol Hill against the Neal Bill for about six years now. He says re/insurance generally come and set up in Bermuda because there’s less red tape. He says the reputation and history of the Bermuda Monetary Authority (BMA) as being able to review an insurance capital provider’s business plan and licence application and make a quick decision is key.“The best example of that came from the CEO of one of our members [Axis Capital] who set up here after the 9/11 tragedy,” Mr Kading said in an interview with The Royal Gazette last week. “He said he presented his business plan and licence application to the BMA and got a licence in 60 days. In Europe it took him six months and seven years later he said he was still trying to get a hold of his US licence.“If you’re a group of investors, you’re trying to quickly get your capital into the market to take advantage of business opportunities and Bermuda was always best able to do that.”The last “wave” of opportunity for reinsurers in Bermuda was in 2005 after Hurricanes Katrina, Rita and Wilma caused a shortage in US insurance capacity and sent rates skyrocketing. Investors came to Bermuda so they could set up quickly and start writing business US companies couldn’t. Because they were up and running within months and soon making a profit, many were then able to open up offices in the US.Mr Kading says another big reason re/insurance companies are in Bermuda is because there’s a “Silicon Valley effect”.“If, for example, you’re in property catastrophe — all the leading providers of this speciality coverage are here. Their senior underwriters are here and the brokers know that they can bring their business to Bermuda and have the best shot at getting a variety of quotes and a variety of competitors in one place. Instead of having to go to New York, London, Swtizerland and Bermuda, there’s the capability of coming to Bermuda first because of the scale and the number of players here.”Mr Kading also argues that Bermuda is not no-tax, but rather low tax. He says Bermuda’s payroll tax of 14 percent is effectively an income tax of sorts and that all insurance transactions with the US essentially incur a sales tax — with premiums being subject to the Federal Excise Tax.Tax’s Effect on BermudaRep Neal says his bill would close tax loopholes and raise as much as $12 billion over ten years. But opponents of the bill argue that’s a drop in the bucket when compared to the US national debt, which eclipsed $16 trillion last month. They also say that disallowing the reinsurance premium deduction would violate international tax treaties, shrink the supply of reinsurance and raise reinsurance rates for US companies. It could also force some reinsurers to shut down their US subsidiaries, putting more Americans out of work.Mr Kading says while the reinsurance tax does not single out Bermuda and targets reinsurers in other no or low-tax jurisdictions like Cayman, Switzerland and Ireland, it could have a greater impact on Bermuda’s economy.“You could make the case that the Bermuda economy is more dependent on reinsurance and therefore it is hit worse and I think that’s a correct conclusion,” Mr Kading said.“If you no longer can use affiliated reinsurance to support your US business subsidiaries then that encourages Bermuda based insurance groups to look elsewhere to deploy their capital. Looking elsewhere to Europe or Asia means that Bermuda no longer is that geographically convenient to your important market, as it is to the US, and thus makes it more likely that the insurance managements move their teams to be closer to those main markets.”“This is about defending Bermuda against foreign attack and defending Bermuda’s ability to defend its own economy.”Tax’s Effect on the USWhile the legislation could be detrimental to Bermuda’s largest industry, it could have an even more adverse effect on American jobs and the economy as a whole, Mr Kading says.“That’s the irony. Congressman Neal says this is all about penalising people who send jobs offshore, but Bermuda companies and European insurers are direct investors in the US economy employing people in the US that would not otherwise be employed at insurance companies. We have 15,000 or more employees in the US.”The bill could also affect insurance rates all across the US. In a study of an earlier version of the Neal Bill, the Brattle Group, a leading economic consulting firm, found that targeting global insurance companies for special punitive taxes would reduce the supply of reinsurance by 20 percent, which would raise rates.The Coalition for Competitive Insurance Rates, of which ABIR is a member, says that could be disastrous for homeowners and businesses — particularly in hurricane-prone Florida, which already has the highest mortgage delinquency rate in the US and an unemployment rate higher than the national average.A new survey released Monday by Leadership Florida finds that property insurance is now a greater concern than property taxes for Florida residents. Neal bill opponents say further rate hikes could put even more stress on taxpayers in an already shaky economy.Post-Election Threat?While the Neal Bill has been an on-again-off-again threat to reinsurers for a number of years, Mr Kading says it could be brought up again in the lame duck session of Congress after the election.“It’s not clear what will happen there, but you have tax-extenders still alive, you have the potential for a grand bargain and it all sort of is dependant on the election outcome. If you have a status quo election with the same power centres being re-elected, the sense is that there’s probably more that will get done in a lame duck than otherwise would be the case.“The lame duck threat is real, we just don’t know how to define the threat right now.”In all the years Rep. Neal has been pushing this legislation, he’s never had been able to gain enough traction to get it passed.“There are 535 members of the House of Representatives and normally, to show support, you try to get your colleagues to sign on. He’s never had more than like one sponsor on it,” said a seasoned lobbyist who has been involved in several US tax bills over the years, and wished to remain anonymous.That lobbyist thinks the likelihood of the Neal Bill coming up again between now and the end of the year is not very great if the US Congress remains divided between the two parties.“It’s a huge issue in Bermuda — there’s no question. It’s the biggest threat to the economy of reinsurance companies and to the country of Bermuda — and in a time when the economy’s not doing all that great. It’s a very important issue but at least given the current political forces, and where I see them going between now and the end of the year, I don’t think there’s much risk.”“The heightened interest in this is when the democrats are in control. When you have split government, on this issue — it’s helpful for Bermuda.”Insurance Industry ReactionGiven the sensitivities of the issue, most re/insurance executives The Royal Gazette spoke to were reluctant to go on the record with their views.One source told this newspaper they too are waiting to see what the outcome of the election is and will be paying close attention to what happens in the lame duck session that commences on November 13.Whether the issue comes up in the lame duck session or not, it could be on the agenda in 2013 when tax reform could be the focus for US lawmakers.“The conventional wisdom is that they’ll have to do something to avert the worst of this ‘fiscal cliff’ impact. It wouldn’t be a good development for Bermuda simply because of the direct impact on the companies.”While Bermuda is not singled out by the legislation, the source said other jurisdictions like Ireland and Switzerland are better protected by their tax treaties and political clout than Bermuda is.“The US has a network of tax treaties and it’s hard to square his [Neal’s] bill with the commitments the US has undertaken in these tax treaties. And some of these countries have told the US they see that as a violation of their tax treaties.“Bermuda has something called a tax treaty, but it’s not a full one so Bermuda tends to get lumped in with the so-called tax havens — the Caymans of the world — whereas Switzerland and Ireland are low-tax jurisdictions and tend to be just on the other side of that line.“We’re very committed to Bermuda. We very much want to see Bermuda succeed. But you’ve seen some of the re-domestications over the years, which I think are representative of hedging of bets.”Bermuda Could Do MoreOne source told The Royal Gazette that to stay competitive, the Bermuda Government could do more to fight against the Neal Bill and work to improved its image.“Anything that hurts the competitiveness of the jurisdiction or the country’s image is something they need to be worried about. I know Bermuda’s tried to be more user-friendly on the employment side, but I’m not sure if that’s sufficient.“We all get a little complacent when we’ve had it pretty well for a long time. So I think that’s a good message for Bermuda to hear — they’re finally having to come to grips with the competitiveness of the global economy. For years they were a very high-cost centre but because of low taxes and not-so-overdone regulation as you see in the US, that was enough to counter balance that and it’s not anymore. Companies in our industry have been moving off the island — not onto the island. Whether it’s Ireland or India — virtually every company I know of has some part of its back office function in India now. Ten, 15 years ago — that would’ve been in Bermuda.”Ken Levine, chairman of Levine & Company, a Washington, DC-based firm that lobbies for the Bermuda Ministry of Finance on tax matters pending before the US Congress, says Bermuda has been fighting against the Neal Bill for years but to date, has never seen the legislation gain any serious traction.“The Premier’s been to Washington many times over the last several years — both as Finance Minister and as Premier. She’s met with over 100 members of Congress and has explained Bermuda’s opposition to the Neal bill in terms of it not only being bad for Bermuda but also bad policy for the US,” Mr Levine said. “If this issue is seriously considered by the Congress, the Premier will come back to Washington and meet with the people she has already met with and others to explain why the bill is bad for both Bermuda and the US.”In addition both Democrats and Republicans opposing the Neal Bill and many nations expressing their opposition to it — more than 100 independent experts, state government officials, business owners and associations have opposed it as well.Congressman Neal has received more campaign contributions for 2011-2012 from the insurance industry than any other industry with US-based insurers like New York Life Insurance, Chubb and Travelers topping the list.