Try The Bermuda Angle

In the nearly ten years of the existence of the Sovereign Society I personally have encountered numerous instances in which American-based lawyers, bankers, investment and retirement advisors and stock brokers literally have lied to them when their U.S. clients suggested they wished to engage in offshore financial activity.

Recently I wrote about a Merrill Lynch agent who falsely told a client that she should not convert her IRA into an offshore retirement account, greatly exaggerating the tax costs that would ensue. He simply did not want to lose her business to a foreign firm. Most domestic American lawyers whose clients suggest an offshore asset protection trust are barraged with untrue horror tales 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 annuity as a tax-deferred investment vehicle, and you will likely get similar dissimulation. And certainly American bankers want to keep funds in their hot hands rather then see it 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 Babies

There is a strong parallel to this anti-offshore prejudice in parts of the American corporate world. Its greedy voice was heard last week in a 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 enable some of 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 avail themselves of these same tax breaks if they so chose).

At issue are long standing U.S. tax code provisions that allow insurance premiums to be shifted from the United States to offshore affiliates, in the form of payments for re-insurance, which reduces U.S. taxes and allows the proceeds to be invested tax free, increasing the profit to parent companies. Re-insurance is essential to keep insurance companies on a sound financial basis in times of major catastrophes.

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 -- income taxes on dividends paid to stockholders, all of these taxes adding to the costs to consumers. 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 from their American taxes premiums that their subsidiaries in the United States collect from American customers and send back 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 U.K. U.S. insurance companies have done this by incorporating affiliates there since the 1970s. Since Hurricane Katrina and the 9-11 terror attacks, $25 billion in insurance claims have been delivered from Bermuda to American policy holders. Perhaps even more impressive, $100 billion dollars of U.S. capital is invested in Bermuda; the overwhelming majority of that money is a result of the insurance and re-insurance industry.

U.S. insurers like Liberty Mutual, Hartford and Chubb claim they cannot easily capitalize on the tax law. So they want Congress to close what they see as a loophole so they can compete with Bermuda-based rivals like Ace, XL and Arch. The Bermuda based American insurance affiliates are in fact 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 $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. This all ties in with the global war again tax competition and against tax havens; indeed several bills now pending on Congress would seriously impair the rights of every American to invest, trade, bank and do business 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.

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. http://www.sovereignsociety.com/login.php?nid=731