Let The Finger Pointing Begin

In a 23 February 2009 Business Insurance article entitled "Unpaid Premium Taxes in Europe Put Policyholders at Risk", I found myself screaming at the paper I was reading. In the article, it describes the fact that despite the landmark ruling by the European Court of Justice in 2001 which set a precedent for the payment of outstanding insurance premium tax liabilities across the European Union, the article suggests that experts in the D&O marketplace have ignored the issue. What was more amazing is that the article implies that perhaps brokers, carriers and risk managers were not fully aware. Unbelievable!

If any of these people had wanted to act properly, all that was needed was to discuss it with the international resources within the brokerage and carrier community, and they would have been advised properly on the issue. These resources who structure programs for the U.S. companies on all their other property and liability lines of business, have been addressing tax issues on policies extending to local coverage in countries for years.

I know first-hand that this issue was researched, discussed, and presentations made to management of one carrier, only to have them say that the cost associated with it (read 'being in compliance') was more than they wished to spend. Short sighted for sure. I will be curious who will take the fall for this decision when the tax bills come due.

For those unfamiliar with the case, Kvaerner plc, a UK resident company, purchased an insurance policy from a UK insurance company to cover all of its global operations. Included within its global operations was a Dutch company, John Brown Engineers en Constructors BV, which was held through a wholly owned UK subsidiary company.

The insurance contract stated that the insured could be Kvaerner itself and any of its subsidiaries and associates as instructed by Kvaerner. Kvaerner paid the full premium and passed the costs onto the relevant group companies. Without specific instruction from John Brown to do so, Kvaerner included John Brown within the insurance coverage and indirectly invoiced a share of the premium to John Brown.

Upon discovery of the insurance policy, the Dutch tax authority billed Kvaerner for Dutch premium tax on John Brown's allocated share of the global premium. In 2001, the European Court of Justice ruled that the Dutch tax authorities were entitled to collect this tax and so the decision went in favor of the Dutch tax authorities.

Under Dutch tax law insurance premium tax is levied on insurance premiums covering risks situated in the Netherlands. Location is defined as the principle establishment of the legal person and any other permanent presence of the legal person. Dutch tax law is in accord with EU law which states that every insurance contract shall be subject exclusively to insurance premium taxes in the EU country where the risk is situated. This is further described as the country where the policyholder has habitual residence or where it is a legal person.

The ECJ was asked to rule on three questions;

• Can a tax authority of an EU country levy a legal entity established in another EU country for premium taxes due on a business establishment within its boundaries where the premium was paid to an insurer based in the EU? ECJ Ruling: Yes
  
• Does it matter if the policyholder is not the overall parent company, but some other company in the group? ECJ Ruling: No
  
• Does it matter if the cost of the insurance premium is not passed on (wholly or in part) to the subsidiary company? ECJ Ruling: No. The method of payment or invoicing is irrelevant. Even if no intra-group charge exists the tax authority can still impose a premium tax levy.
  

The obligation to pay premium tax applies to any business operating within the EU, wherever the contract of insurance is entered into or where the head office is located.

The economic conditions in countries worldwide are driving their revenues down. As they look to recoup lost revenues, the simplest thing for them to do is to collect the money that is due to them by law. The premium tax on U.S. policies covering exposures 'Worldwide', e.g., D&O, Umbrella, and Professional Liability to name a few, can generate million of Euros for these countries because they can go back to 2001 and collect.

When these bills come due, it appears that the carriers, brokers, and risk managers are already preparing to plead ignorance and blame others for the problems brought on by their inaction.