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Who’s loving the government shutdown? Big league offshorers, maybe.

by Resurgent Insider Read Profile arrow_right_alt

As the government shutdown continues, a major offshoring industry is using lawmakers’ inattention to other policymaking to press for changes benefiting them over a big domestic industry.

Following the passage of 2017’s tax reform bill, the Treasury Department has releasedan implementation rule relating to a tax practice called “netting.”

“Netting” was banned by 2017’s tax reform law but is favored by the Bermuda insurance industry and high net worth individuals seeking to minimize their exposure to US taxes. 

The Treasury rule appears to open the door to reinstating netting, which is part of what is known as the “Bermuda Reinsurance Loophole.” That loophole is used not just within the insurance industry but also by wealthy individuals as a tax avoidance strategy.

Quoting from the rule:

The Treasury Department and the IRS request comments addressing whether a distinction should be made between reinsurance contracts entered into by an applicable taxpayer and a foreign related party that provide for settlement of amounts owed on a net basis and other commercial contracts entered into by an applicable taxpayer and a foreign related party that provide for netting of items payable by one party against items payable by the other party in determining that net amount to be paid between the parties.

Treasury would not have asked for comments on netting if it were not open to bringing it back by the back door—or so the theory goes.

Allowing netting, and reinstatement of the loophole, is a key priority of a range of offshore insurers, especially Bermudan companies. 

Last year, tax industry publication Tax Notes obtained by a Freedom of Information Act request documents showing Brownstein Hyatt Farber Schreck LLP and McGuireWoods LLP pressing Treasury to permit netting despite the changes set out in 2017’s tax reform bill. Both firms are lobbyists for the Bermuda insurance industry.

Accounting firm Ernst & Young is also believed to be pressing for the changes, seeking to rally congressional Democrats to reverse the tax law change by leveraging liberal opposition to the GOP tax bill as a whole. EY were heavily involved in lobbying for keeping the Bermuda Reinsurance Loophole in the 2017 tax bill.

However, the Treasury rule is a different avenue towards keeping the loophole alive, and one that may indicate an openness by Treasury’s International Tax Counsel Chip Harter or Treasury Secretary Steven Mnuchin to Bermudan insurers’ arguments. Much of the pro-loophole correspondence from lobbyists for Bermudan insurers appears to have been directed at Harter.

If so, that may put both men at odds with President Trump and Republicans in Congress, who have opposed allowing the loophole, and the associated practice of netting, on the basis that it was contributing to erosion of the US tax base and exacerbating the problem of offshoring. It may also be a tough sell with Democrats like Ohio Sen. Sherrod Brown, who is a vehement opponent of offshoring and whose state is home to a bunch of American insurance companies.

Of course, while the government shutdown continues, no one is paying attention to the details of a year-old tax reform bill and how Treasury is proposing implementing them. It’s all about who will trade what for what on immigration in order to bring the shutdown to an end. 


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