Violating an international tax treaty usually isn’t a major concern during the typical work day for most people. For some industries like insurance, however, this is actually a legitimate possibility. The New York State Tax Appeals Tribunal decided Sept. 11, 2017, in two almost identical cases, that the state’s tax calculations violated international treaties, highlighting the intricate tax environment in which the insurance industry operates.
In New York Tax Appeals Tribunal Decision No. 824762 (petitioner Bayerische Beamtenkrankenkasse (Bayerische)) and New York Tax Appeals Tribunal Decision No. 825517 (petitioner Landschaftliche Brandkasse Hannover (Landschaftliche)), two German insurance companies claimed that they were properly subject to New York’s insurance premiums tax, not the state’s insurance company franchise tax. N.Y. Tax Law § 1502-A imposes a gross premiums tax on non-life insurance corporations written on in-state risks.
The tribunal ruled that the premiums tax was inapplicable because it was imposed only on authorized insurance companies, which neither Bayerische nor Landschaftliche were. Additionally, the companies’ business activities in New York were limited to commercial real estate investment, so there were no in-state premiums. Therefore, the tribunal determined that the companies were properly subject to N.Y. Tax Law § 1501’s insurance franchise tax. But this determination complicated matters.
In calculating the companies’ liabilities, the state division of taxation used the entire net income base under N.Y. Tax Law § 1502(a). The standard statutory allocation under N.Y. Tax Law § 1504(a) for entire net income is based on a taxpayer’s premiums; however, the division believed that an alternative allocation method under N.Y. Tax Law § 1504(d) without considering New York premiums was more appropriate because the companies had no in-state premiums. Both the Administrative Law Judge and the tribunal on appeal found that the division had used its discretion properly in using this alternative allocation method.
This wasn’t the end of the discussion about allocation, however. Both companies argued that the division had violated the United States–Germany Tax Treaty because its alternative allocation discriminated against them as alien insurance companies (insurers based in other countries).
Under New York law, the entire net income for a foreign insurer (an insurer based in another state) is based on its premiums and includes consideration of its worldwide premiums income, unlike the division’s treatment of Bayerische and Landschaftliche. Article 24 of the U.S.–German treaty forbids the two countries from “other or more burdensome” taxation on entities from the other country than the tax treatment imposed on nationals of the country imposing the tax.
The tribunal agreed with Bayerische’s and Landschaftliche’s argument that the division’s use of the alternative allocation method in these cases was “other or more burdensome” tax treatment; thus, the treaty had been violated, and the companies’ notices of deficiency were canceled.
The devil was in the details in these cases, and similar issues could occur in other situations involving alien insurers. As Eversheds Sutherland’s P. Bruce Wright explained during Bloomberg BNA’s 2017 Captive Insurance Tax Summit on Oct. 24, the U.S.–German treaty’s provisions dictated the decisions in Bayerische and Landschaftliche. Treaties with other jurisdictions may have differing rules, so practitioners should check the details of all governing documents to make sure they are calculating relevant state insurance taxes correctly.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Absent Article 24 of the United States–Germany Tax Treaty, what do you think is the proper taxation treatment for Bayerische and Landschaftliche?
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