Playing the Bermuda Angle
Today’s comment is by Bob Bauman, The Sovereign Society’s Legal Counsel and offshore expert.
Dear A-Letter Reader,
In the nearly 10 years The Sovereign Society has been in existence, I personally have encountered numerous instances when financial experts have flat out lied to their clients.
I’ve watched American-based lawyers, bankers, stock brokers, investment advisors and retirement planners literally lie to their U.S. clients, when these clients mentioned they were interested in pursuing offshore activities.
Recently, I wrote about a Merrill Lynch agent who did just that. He falsely advised a client not to convert her IRA into an offshore retirement account, and greatly exaggerated the tax costs that would ensue. In reality, he just didn’t want to lose her business to a foreign firm.
If you ask most domestic American lawyers about an offshore asset protection trust, you’ll be barraged with false horror stories. You’ll hear about anti-money laundering laws and the PATRIOT Act curtailing offshore activity, usually with the added threat that the IRS will audit you if you dare to go offshore.
Ask a U.S. insurance or annuity agent about an offshore life insurance policy or using an offshore annuity as a tax-deferred investment vehicle, and you will likely get a similar response.
And certainly American bankers want to keep funds in their hot hands rather than see your cash transferred abroad. Indeed, this puts bankers in league with the IRS and plaintiff's lawyers who want your money where they can get their hands on it.
Cry Baby Companies
This anti-offshore prejudice also exists in the American corporate world.
You could hear its greedy voice last week during the contrived U.S. Senate hearings on what can reasonably be seen as a non-problem. Some of America's largest insurance companies urged the Senate Finance Committee to change tax laws and rules that allow their competitors to avoid billions of dollars in federal taxes by sending money to their affiliates in Bermuda and other tax havens. (These complaining companies could also receive the same tax breaks if they chose to do so.)
They were debating the long-standing U.S. tax code provisions that allow insurance premiums to be shifted from the United States to offshore affiliates. These premiums can be shifted in the form of payments for re-insurance. Re-insurance is essential to keeping insurance companies on a sound financial basis in times of major catastrophes. By shifting re-insurance payments offshore, it reduces a company’s U.S. taxes and allows the proceeds to be invested tax-free. This in turn increases profits to parent companies.
Why is This a Good Idea for a Business?
Start with the fact that U.S. corporate taxes at 35% are some of the highest in the world. Add to that the double tax – shareholders are forced to pay income taxes on dividends. All of these taxes add to the company’s costs, which means they charge consumers more.
By comparison, if a company can legally transfer its funds to Bermuda by buying needed re-insurance, there is no tax at all on the funds or the profits from their reinvestment and the payments are deductible business expenses.
The United States tax treaty with Bermuda allows insurance companies based on the island to deduct premiums from their American taxes that their subsidiaries in the United States collect from American customers. They can then send back these premiums to the headquarters abroad.
In Bermuda and other tax havens, the money is invested tax-free. Bermuda's zero tax rate has lured many insurance companies to incorporate there after moving away from high-tax countries like the United Kingdom. U.S. insurance companies have done this by incorporating affiliates there since the 1970s.
Since Hurricane Katrina and the 9-11 terror attacks, US$25 billion in insurance claims have been delivered from Bermuda to American policy holders. Perhaps even more impressive, US$100 billion of U.S. capital is invested in Bermuda. The overwhelming majority of that money is a result of the insurance and re-insurance industry.
A Hot Button Issue Right Now
U.S. insurers like Liberty Mutual, Hartford and Chubb claim they cannot easily capitalize on the tax law. So they want Congress to close this so-called “loophole” so they can compete with Bermuda-based rivals like Ace, XL and Arch.
In fact, the Bermuda-based American insurance affiliates are simply using the U.S. code provisions as they are allowed to. They say the tax law is a valuable tool for attracting foreign investment to the United States and should not be changed. Indeed, the US$100 billion in foreign investments are far more important to the American economy than any taxes forgone in the transactions.
A strong insurance industry in Bermuda helps the United States economy by providing coverage that is otherwise scarce for catastrophes like Hurricane Katrina. A change in the tax law would mean higher insurance prices for many Americans. Americans and U.S. businesses paid $499 billion for property and casualty insurance in 2006, nearly 4 cents out of each dollar of the gross national product. Apparently U.S. insurance companies want us to pay even more.
Unholy Alliance
Unfortunately, a coalition of high-tax, leftist Democrats and pro-big business, isolationist Republicans in Congress are seriously considering changing the tax law to block tax breaks for insurance companies who go offshore.
In an age of great economic growth prompted by globalism, this sort of Neanderthal non-economics has no place in a rational world.
But who ever heard of rational thinking in the U.S. Congress? And those cry baby big insurance companies make very big political contributions.
BOB BAUMAN, Legal Counsel
P.S. If you’re looking for the right offshore professional who will answer your questions (and give you the straight answers), click here to visit our Council of Experts page for contact information.
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