Bermuda takes hedge fund re fight to Capitol Hill

Bermuda is battling hard to make its voice heard in Washington’s corridors of power as the controversy around hedge fund reinsurers rumbles on.

The Association of Bermuda Insurers and Reinsurers (ABIR) had a team of company tax directors in the US capital city to brief congressional staff on its position in relation to Senator Ron Wyden’s proposed Offshore Reinsurance Tax Fairness Act, a bill designed to counter what he called abuses by newly created offshore companies.

Hedge fund managers allegedly have an incentive to lower the rate they pay on profits and postpone the bills indefinitely by routing investments through reinsurers in offshore locations such as Bermuda.

For Wyden this represents a form of tax evasion as, he claims, little re/insurance activity is carried out by these companies.

ABIR chief Brad Kading held lobby meetings earlier this month with congressional staff to cover the pending Wyden legislation. The focus of the meetings was to document the real risk taking done by commercial insurers and reinsurers and explain different types of corporate vehicles being used to take on insurance risk.

“The meetings were useful and the staff were open to comment—they understand that they are not tactical experts on insurance. They have a very clear idea of what they want to do. They want to be able to target an entity where the predominant amount of its income is from the investment side with only a marginal side is from insurance underwriting,” said Kading.

Under the Oregon senator’s bill, a company couldn’t qualify as an insurer for tax purposes if insurance liabilities are less than 10 percent of assets. When the ratio is 10 percent to 25 percent, the determination would be based on “facts and circumstances”.

Any insurance companies managing liabilities of more than 25 percent can therefore be deemed “legitimate” in the eyes of Wyden.

However, the ABIR counters, drawing a line at this level would have severe repercussions for commercial insurance and reinsurance markets and it has instead proposed its own recommendations as to how the US Treasury constitutes what is a real insurer.

It has written to the US Treasury arguing that if it goes down that route it should adopt a ‘bright line safe harbour test’ of a 15 percent reserves-to-assets ratio.

Back in April the Internal Revenue Service (IRS) issued a notice of proposed rulemaking titled Exception from Passive Income for Certain Foreign Insurance Companies. The proposed rules seek to separate truly ‘active’ reinsurance companies from those that allegedly serve merely as vehicles for US hedge fund investors to shelter investment income from taxation.

The passive foreign investment company (PFIC) rules of US tax law are designed to prevent US taxpayers from delaying US tax on investment income by holding investments through offshore corporations. The PFIC rules provide an exception for income derived from the active conduct of an insurance business.

What’s likely to happen next is that if there is an international tax bill passing through Congress then PFIC will get tagged into that legislation. There are two more months of the 2015 congressional session and six months’ activity time in a presidential election year, but it’s likely there will be an effort to put some tax bills through within the allocated timeframe.

“We think that’s what the advocates, particularly Senator Wyden, want to do with it,” said Kading.

“Our goal is to have the current proposals amended to narrowly target those entities the staff have identified that they want to target.”

The Treasury is expected to publish its regulation by the end of the year. Even then, Congress might decide to pass its own legislation if it is felt the Treasury voice does not echo its own.