The European insurance and reinsurance federation (CEA) has suggested to the US House of Representatives that proposals to change the US tax treatment of reinsurance between affiliated entities could be in contravention of America's World Trade Organization (WTO) commitments under the General Agreement on Trade in Services (GATS) and its commitment to the G20 to avoid protectionism. It is supported by the European Commission in this contention.

Bill HR 3424, introduced in the US House of Representatives on July 30, 2009 by Representative Richard Neal, contains a provision to deny a tax deduction for reinsurance premiums to related foreign entities that exceed an industry average. The US administration’s 2011 budget proposal would similarly deny deductions for certain reinsurance premiums paid to related foreign reinsurance companies.

“EU reinsurers face an average tax burden of 25%, so the argument that the existing tax deduction could create incentives to reinsure more than would otherwise occur between unrelated entities does not hold true,” said Tommy Persson, president of the CEA. “The proposals would also lead to taxation in both the US and the reinsurer’s country of origin, thereby violating US double tax treaties.”

The CEA contends that US law already includes adequate tools to deal with “income shifting” from US insurance subsidiaries to foreign affiliate reinsurers, and that the transfer pricing rules of the US Internal Revenue Code mean that no further measures are required to prevent tax evasion.

The CEA believes that, since the proposals were only applicable to foreign, not US reinsurers, they could contravene the US G-20 commitment to avoid protectionism and its WTO commitments under GATS.

European Commissioners Michel Barnier and Karel De Gucht also wrote to Rep. Richard Neal on his Bill, indicating that the legislation could be at odds with the WTO agreement in which it is stipulated that foreign companies must be treated on equal terms with US counterparts; accordingly European reinsurers should not be penalized, they argued.

Other outspoken European opponents to the Bill include Klaus Scharioth, German ambassador to the United States, and Alex Kaplan, vice president for regulatory affairs at Swiss Re, who called it "an egregious violation of multiple international agreements, including the G20 agreement”.

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