Border Patrol

taxes__illustrationWith Republican control of the Executive and Congressional branches of government enactment of tax reform in 2017 is highly possible.  Various proposals are being considered during the 2017 Congressional session and insurers have a lot at stake as Congress considers comprehensive tax reform.   Such legislation aims to lower individual and corporate tax rates, eliminate or limit most tax deductions, credits and exclusions, and dramatically restructure how the US taxes earnings of U.S. companies that sell goods and services outside the US.

Probably the biggest issue right now is a border adjustment tax proposed by Speaker Ryan. Taxes would apply based on the destination of where goods and services are consumed, rather than where they are produced or where the business has its headquarters.   This tax would make it virtually impossible for US insurers to buy global reinsurance, which they commonly use to spread risk and keep insurance rates affordable. It is still uncertain whether financial services transactions will be taxable if this proceeds, but the impact to reinsurance costs are estimated to be in the billions. In most other countries that have a similar value-added tax, or VAT, financial services transactions because the actual “destination” of such cash flows is difficult to discern.

Under current tax law, US insurers can write off the costs of international reinsurance just like any other cost of doing business, helping them to keep policies affordable. They cede about 20 percent of direct written premiums to reinsurers annually.  If insurers are not able to buy reinsurance to spread their risk, all the risk would be concentrated in the US rather than spread globally. This would make the insurance market less competitive, and result in higher premiums. The Brattle Group estimated that the impact of the tax is anywhere from $8B to $34B – a large range due to the fact that there is limited information on the proposal as of yet.

A border-adjustment tax is one of the ideas that has been floated in Washington as part of a major tax reform effort expected this year. To date, specific legislative proposals have not yet been put forward by Congress or the White House.  VCIA is working with the same coalition that opposes the Neal Bill on this issue to request a similar exemption.

Whatever road Washington takes on tax reform, it must act carefully and avoid the unintended consequences of a proposal like a border-adjustment tax.

I look forward to hearing from you.

Rich Smith
VCIA President