Eliminating the Deduction for Foreign Reinsurance Premiums Creates More Problems than It Solves

Several recent tax proposals have included provisions to eliminate deductions for legitimate business costs. Appearing in multiple proposals has been a provision to eliminate the deduction to insurance companies for reinsurance premiums paid to foreign affiliated insurance companies if the premium is not subject to U.S. income taxation and to provide an exclusion from income for reinsurance recovered for any arrangement where the deduction was disallowed.

The goal of the proposal is to handle the perceived problem of profit-shifting so the government can raise revenue. However, the revenue will be raised by increasing the cost of capital. While the deduction eliminated is neatly matched with the income exclusion, it creates complexity and inconsistency in the definition of the corporate tax base. Moreover, it neglects the risk-spreading benefits of an international reinsurance industry, treating this legitimate business practice as mere profit-shifting.

Taking the insurance business to an international level represents a real, significant and serious benefit to insurance practices because insurance companies, like their clients, also like to mitigate risks by sharing them broadly. This is done through reinsurance, which is an ordinary and necessary expenses for doing business.

Under the Taxes and Growth model, the proposal to limit the deductibility of reinsurance premiums would:

– Result in a 0.3 percent increase in the service price of capital, as the costs of the tax on reinsurance, one way or another, filter back to domestic savers.
– Only raise $440 million instead of $710 million at the cost of $1.35 billion.
– Reduce GDP by nearly twice the revenue it collects.
– The private sector as a whole would lose $4.07 for every additional dollar collected by the government over the long term.

Eliminating the deduction for foreign reinsurance premiums ultimately creates more problems than it solves. Congress could look to larger reforms that make the U.S. more attractive as a domicile for corporations.

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