A pair of lawmakers have introduced legislation to end a tax break that favors foreign-controlled insurers over U.S. insurers.

Congressman Richard E. Neal, D-Mass., the ranking Democrat on the House Ways and Means Select Revenue Subcommittee, and Senator Robert Menendez, D-N.J., a member of the Senate Finance Committee, introduced bills in both the House and Senate this week to close an unintended tax loophole that they contend costs taxpayers billions of dollars and provides foreign-owned insurers a significant advantage over their U.S. competitors in serving the domestic market.

Under current law, foreign-controlled property and casualty insurers are allowed to strip their income generated in the United States into tax havens and avoid U.S. taxes by reinsuring their U.S. business with foreign affiliates. Over the past decade, the amount of domestic insurance capital that has migrated to tax havens overseas to take advantage of this flaw in the tax laws has increased significantly.

To close the loophole and eliminate the competitive advantage for foreign-owned insurers, the legislation would effectively defer the deduction for any reinsurance premiums paid to a foreign affiliate, if the premium is not subject to U.S. tax.

“Many foreign-based insurance companies are using affiliate reinsurance to shift their U.S. reserves into tax havens overseas, thereby avoiding U.S. tax on their investment income,” Neal said in a statement. “This provides these companies with a significant unfair competitive advantage over U.S. based companies, which must pay tax on their investment income. That is why I am filing legislation to end the Bermuda reinsurance loophole. Ending this unintended tax subsidy for foreign insurance companies will stop the capital flight at the expense of American taxpayers and restore competitive balance for domestic companies. It simply reinforces my efforts to combat offshore tax avoidance, regardless of what industry is impacted.”

Congress’s Joint Tax Committee estimates that the legislation would help to reduce the deficit by over $12 billion over 10 years.

The revised legislation has been developed in consultation with tax experts at the Treasury Department and the staff of Congress’s Joint Committee on Taxation to address concerns that were raised with prior versions of the bill and develop a balanced approach to address the tax loophole. To make sure that foreign-based insurers cannot be disadvantaged relative to domestic insurers, the legislation allows foreign-based groups an election to avoid the deduction deferral rule and be taxed similarly to a U.S. company on the income from these affiliate reinsurance transactions. A foreign tax credit is provided for any foreign taxes paid on such income. The proposed legislation would be consistent with U.S. tax treaty and trade agreement obligations, according to its backers.

“The increasing trend of foreign insurance companies moving profits made in America offshore and sticking Americans with the bill is incredibly troubling,” said Menendez. “This legislation will staunch the flow of capital overseas, protect American jobs, and reduce deficits by shutting down a tax loophole that provides a huge unintended subsidy to foreign companies at the expense of both their U.S. competitors and American taxpayers.”

A group representing the reinsurance industry, the Coalition for Competitive Insurance Rates, is objecting to the proposed legislation, arguing that it would increase costs and limit coverage availability for American consumers.

“The legislation introduced closely mirrors thinking we have seen time and again from the Obama Administration and Congress,” said Bill Newton, executive director of the Florida Consumer Action Network, in a statement. “Our concerns remain the same: instituting a tax on foreign affiliate reinsurance would only result in a more limited U.S. domestic insurance capacity and more expensive insurance coverage, a major threat to homeowners and small businesses whether they are in Florida, Massachusetts, New Jersey or elsewhere, but particularly those in states that are historically susceptible to natural disaster.”