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Big League Economics

Langer: How Senate tax reform bill ends tax dodge driving U.S. life insurance firms overseas

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The president of the Institute for Liberty told Big League Politics he is thrilled the Senate’s version of President Donald J. Trump’s tax reform program closes a tax loophole in the federal tax code that encourages American life insurance companies to move their headquarters overseas.

“I’m all in favor of free markets. I’m all in favor of tax competition, but it is not tax competition when you have vastly different regulatory schemes that are underlying the conditions of trade,” said Andrew Langer, who in addition to his leadership of the Institue for Liberty, is a radio talk show host on Baltimore’s WBAL and of the “LangerCast” podcast.

The situation Langer is describing is practice by life insurance companies of taking in life insurance premiums, which are normally considered income, but then taking those premiums and purchasing a re-insurance policy against the original policy–re-insurance is insurance on insurance and typically is a way for the company to mitigate its risk.

In this case, if the insurance company is based overseas, the purchase of the reinsurance policy that was income becomes an expense, thus, washing away the tax vulnerability.

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Langer said this practice is part of a larger specialty called “base erosion,” which tailors a companies business practices to exploit different regulatory and tax rules in different countries.

In a bizarre twist, this practice of doing business in the United States tax-free forces American-domiciled companies to either compete at a tax disadvantage or move overseas themselves, he said.

The most famous example of “base erosion” was the decision to make part of the 1965 movie “Help!” starring The Beatles in Bermuda, so that the film’s profits were taxed under Bermuda’s more generous tax code, instead of the heavier taxes that would have to have been paid if the movie was taxed under the  United Kingdom’s tax regime.

It might have been a great tax strategy, but it was a horrible film.

The Beatles: Paul McCartney, Ringo Starr, George Harrison and John Lennon, in Bermuda while shooting the 1965 movie “Help!” The film included scenes shot in Bermuda in order to avoid paying British taxes on the film. (Photo courtesy of The Beatles)

Langer was the lead author of a coalition letter that called on senators to support the elimination of the loophole in the final bill.

“The Senate tax bill includes strong anti-base erosion measures that will go a long way in stopping foreign companies from gaming the U.S. tax code. It is imperative that Congress resist any desperate attempts by foreign insurers to weaken the language thereby preserving their loophole,” he wrote.

This tax dodge has been in play for 30 years and it has led to U.S. life insurance companies moving their headquarters to either Bermuda or Switzerland, where the regulatory climate is as pleasant as the tax climate, he wrote. “The Senate bill would merely require foreign companies to pay U.S. taxes on their U.S. generated insurance business instead of allowing them to use offshore affiliates to strip earnings.”

Joining Langer on the letter were: Judson Phillips, Tea Party Nation; Ed Martin, Phyllis Schlafly Eagles; John Fredericks, The John Fredericks Show; Rick Manning, Americans for Limited Government and Jerry Rogers, Capitol Allies.

Read the coalition letter here:

Congress-Must-Undo-Crony-Insurance-Tax-Loophole_Coalition-Letter

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