Moves by four American insurance giants who have gone to Congress to close a loophole which allows their Bermuda-based competitors to avoid US taxes has been called `protectionism' by a leading Island insurance company.

The US insurers want Congress to pass laws which will stop companies based in Bermuda but actually operating in the US to avoid paying certain taxes in America.

XL Capital Ltd's top legal advisor said yesterday the four US insurers had unfairly singled out Bermuda among offshore centres. And he urged the Government and the Bermuda insurance market to think long and hard about what to do about the proposals now before Congress.

The issue came to light yesterday when an article appeared on the front page of the New York Times stating the American insurers Chubb, Hartford, Kemper and Liberty Mutual are trying to demolish the "tax shelter in Bermuda'' and have gone to Congress to do so.

The companies also said tax benefits on the Island discriminated against fair competition in the United States.

The article opens: "A half-dozen American insurance companies have begun exploiting a loophole in federal tax law.

"By simply moving their headquarters to Bermuda or being acquired by a Bermuda insurer, they no longer have to pay income taxes.'' The article, written by staff reporters David Cay Johnston and Joseph Treaster says the tax loophole is legal and singled out ACE and XL as "thorns in the side of American insurers''.

But ACE Group said it had not built up its business on opportunism.

A spokeswoman told The Royal Gazette yesterday: "As a global company headquartered in Bermuda, ACE does business in almost 50 countries and pays requisite taxes in all of those countries. We haven't built our business strategies on the basis of tax opportunism and don't engage in the practice outlined in the article which appeared in the New York Times.'' Bermuda Insurance giant XL Capital also reacted strongly to the article.

Paul Giordano, XL's in-house general counsel told The Gazette that the Bermuda Government and local companies must take the issue seriously.

He said: "The efforts by a few US insurers to subject their competitors to new taxes is simple protectionism.

"Longstanding US transfer pricing rules are fair in that US insurers are taxed the same on identical transactions without regard to US or foreign ownership because the transactions have the same effect on the US insurers' tax base.'' Mr. Giordano went on to say that under the proposal, a US insurer with a Bermuda parent would be forced to pay higher taxes on reinsurance transactions than their US-owned competitors, even though the transactions had identical terms and identical US tax consequences.

He said in addition to attempting to secure a competitive advantage over US competitors with a Bermuda parent, this proposal seeks to tax income earned by a non-US company outside the US.

"This approach to taxation is contrary to longstanding principles of international tax law,'' he said, "and may legitimise similar action against US companies from countries with higher corporate income tax rates than the US. The principles behind this proposal should be alarming to all non-US companies with US operations regardless of industry.

"These principles should also send a clear message to all non-US domiciles with international business sectors that their economies are in danger of being impacted by extra-territorial efforts to improve the competitive situation of onshore US insurers.

"It cannot be over emphasised, therefore, that measures initiated by offshore administrations which affect the cost of doing business offshore cannot be viewed in isolation but must be seen in a global context.'' The leading newspaper, which is sold all over the world, said that if all American property and casualty insurers followed by moving to Bermuda, they could shelter some $40 billion a year based on recent profits, avoiding $7 billion in taxes annually. They said the estimates had been worked out by US Treasury officials.

It said that the US Treasury would be deprived of four cents of every dollar in income taxes now collected from corporations of all kinds and said state governments were also losing money.

The New York Times also pointed at the recent decisions made by Everest Reinsurance Holdings and PX Re, both New Jersey companies, the Trenwick Group of Connecticut and the White Mountain Insurance Group to move to Bermuda.

The four objecting insurers, the article said, realise that it would be enormously expensive for older companies like theirs to make use of the shelter because of other tax requirements, so they have gone to Congress to turn in their competitors.

"They contend that while legal, the arrangement threatens to reduce drastically the government's revenues,'' the article said.

`US insurers using Bermuda as tax shelter' "They also say it discriminates against any property and casualty insurer that continues to maintain its headquarters in the United States.'' The article quotes Robert Marzocchi, the chief tax executive at Chubb, who have a captive themselves in Bermuda, as saying: "It's a question of fairness. We can't compete with companies that are not paying their share of taxes.'' The US Treasury Department, which oversees tax policy, and members of Congress learned about the practice when representatives of the four big companies came to Capitol Hill three weeks ago to complain. In the article the tax counsel for Democrats on the House Ways and Means Committee, John Buckley, said he was stunned to see a loophole that, while legal, was so blatant and, unlike the arcane transactions in most tax shelters, so easy to understand.

The article says the Bermuda "tax shelter'' is a legal loophole that had been unused until last year.

"The Bermuda tax shelter is unique to the property and casualty insurance business, which took in an estimated $287 billion in premiums last year to cover homeowners, drivers, corporations and small businesses.'' Newpaper article TAXES TAX