The same House tax bill that abolished the adoption tax credit preserved a loophole for Bermuda- and Switzerland-based life-insurance companies who sell insurance to American customers. The Senate bill would close that loophole, and the insurance lobby is fighting an intramural war over this proposed change.

The American Council of Life Insurers is split along national lines, with its foreign members trying to get ACLI to defend the loophole, while the domestic-based companies — who don’t benefit from it — are fighting to keep the influential industry lobby neutral on the question.

ACLI lobbyists are being close-lipped on the internal debate, but a source in on the debate has passed along an email, and the insurance lobby’s staff is scrambling to “avoid a divisive issue,” the email explains.

The issue at hand is a crafty financial arrangement foreign-based insurers use to avoid paying U.S. taxes on the premiums they collect from U.S. customers.

When an insurance company collects premiums from its customers, those premiums are obviously income and thus taxable. If either the customer or the insurer is based in the U.S., then this is taxable in the U.S.

Foreign-based insurers have a trick, however, that allows them to avoid paying taxes on premiums they collect from U.S. customers. The insurers collect the U.S. premiums, then turn around and buy reinsurance from their foreign affiliates, typically based in tax havens like Bermuda or Switzerland. The cost of the reinsurance is deductible against income, and so these foreign insurers end up not paying any taxes on the premiums at the time they collect them. Down the line, when the insured collects his benefit, the insurer collects from the reinsurer and that counts as income.

In effect, foreign insurers get to defer taxes on premiums from American customers, while domestic insurers do not.

There has been a bipartisan push for at least a decade to close this loophole, and the Senate bill includes a provision aimed at doing exactly this (it’s called a “base-erosion” provision). This fix would raise revenues by almost a billion a year, thus offsetting a tiny amount of the cut in the corporate tax rate. This is the definition of tax reform: Make the tax base broader and more equal, while lowering rates.

The Senate provision has sparked blowback from the foreign insurers, who want their industry lobby, ACLI, to officially come out against this reform.

As this column goes to press Tuesday night, ACLI staff are scrambling to find consensus and compromise on the issue, according to a leaked email sent to members.

“As you know,” ACLI executive vice president David Turner wrote Tuesday morning in an email to lobbyists for U.S.-based insurers, “ACLI’s international life reinsurers are deeply concerned with the base erosion minimum tax provision in the Senate bill. However, based on concerns expressed by you and other member companies, the Executive Committee agreed that ACLI should step back to a position of neutrality on this issue.”

The foreign insurers weren’t pleased with neutrality, though. They suggested ACLI at least send a letter “noting their concern” to Finance Committee Chairman Orrin Hatch and ranking Democrat Ron Wyden, according to Turner’s email.

Turner, in the email, pleaded with the domestic insurers, asking them to agree to sending the letter so as to avoid the measure going before ACLI’s board. “We appreciate that you would prefer no action,” Turner wrote to the U.S. insurers, “but hope that this letter could be determined to be a reasonable compromise that would not launch a divisive Board vote process.”

ACLI declined to comment on the group's deliberations, which highlight how contentious internal industry debates can get in a business so determined by tax policy.

Preserving a loophole for Swiss and Bermuda insurance companies wouldn't cost the federal Treasury very much ($900 million is a tiny slice of a $3.2 trillion federal tax haul), but it would undermine the already weakened idea that this represents tax "reform." Reducing the corporate rate while preserving loopholes — like the one for insurance companies based in tax havens — is not a thing reformers do.