WASHINGTON (BestWire) — The long-standing effort to yank away some US tax deductions from foreign companies who cede insurance to offshore affiliates has found new energy, most notably because it had become part of President Barack Obama's budget plan in addition to being a bill in Congress.

Foreign reinsurers are working hard to combat it, yesterday sending a new letter to federal lawmakers, calling the tax proposal "isolationist" and "punitive". The Coalition for Competitive Insurance Rates — a group of companies and associations representing the foreign reinsurance sector — sent the letter to key members of Congress, saying the proposal is "a discriminatory reinsurance tax that will harm US consumers" and claiming it could cost consumers more than $10 billion a year and reduce the country's reinsurance capacity by 20 percent. "The changes proposed are contrary to decades of US tax and trade policy and inconsistent with existing US tax treaty obligations," it said.

The Risk and Insurance Management Society is holding a Washington, DC, conference on this and other reinsurance-related legislation in preparation for members' meetings with lawmakers this week. Brad Kading, president and executive director of the Association of Bermuda Insurers and Reinsurers, led a discussion on this issue.

After it, he told BestWire this idea amounts to "a punishing tax on foreign insurers using US affiliates, and people should be paying attention to it". Mr. Kading's group represents 23 Bermuda-based companies that are responsible for writing about 40 percent of the catastrophe reinsurance market. "The effect of the so-called reinsurance tax will be to decrease the supply of reinsurance to US consumers," he said, and that will increase prices.

Each side of this issue has its own coalition, with the US insurers' group represented by the Coalition for a Domestic Insurance Industry. That group says foreign companies are taking advantage of a loophole by shipping much of their premium revenue off to their own affiliated reinsurers in places with lighter tax loads. When a European Union official criticised the proposal recently, that coalition's leading advocate, William Berkley, told BestWire that this debate "is all about a very simple thing, and that's about an affiliate reinsuring to a parent company. And thus, it's really about moving profits from the United States offshore without paying the proper taxes".

But Mr. Kading insists there is no loophole to close. "The Bermuda companies are paying tax on the US corporate subsidiaries under the same rules that US insurers are, and they're paying the federal excise tax, a gross receipts tax, regardless of profit on that business," he said.

"Because of that, we're paying a comparable tax rate on our US-source business to what our wholly owned U. insurance competitors are paying."

The stand-alone legislation currently in Congress was introduced last year by Representative Richard Neal, chairman of the Select Revenue Measures Subcommittee, and amends the Internal Revenue Code of 1986 to "disallow the deduction for excess non-taxed reinsurance premiums with respect to United States risks paid to affiliates". It had also been introduced in previous sessions but hadn't been acted on. President Obama's budget proposal borrowed the basic idea of Rep. Neal's bill as a revenue generator.

The Obama administration estimated it could collect more than half a billion dollars over a decade if it made the tax-law change.

"It's a pretty juicy target," Kading said. "If you need money to pay for unemployment compensation or food stamps, then they look for every available source of revenue, and this one is on the list."

While his organisation doesn't think the Neal bill will make it on its own, he said it's possible it could be dropped into another legislative effort as a revenue generator.

"You can't look at this in isolation as a tax policy," said Christine Vaughn, a partner at Vinson & Elkins LLP, concentrating on federal taxation issues. "You want to be able to have capital available all over the world, because if you concentrate it within certain geographical places within the US, then it works against you and you end up with less coverage."