The IRS today released an advance version of Rev. Rul. 2016-3 announcing that the IRS will no longer apply the one percent (1%) excise tax imposed by section 4371(3) to premiums paid on a policy of reinsurance issued by one foreign reinsurer to another foreign insurer or reinsurer. With today’s revenue ruling, prior IRS guidance—Rev. Rul. 2008-15—is revoked.
Rev. Rul. 2016-3 [PDF 11 KB] states that the IRS reconsidered Rev. Rul. 2008-15, in light of a May 2015 decision of the U.S. Court of Appeals for the District of Columbia Circuit that section 4371 does not impose federal excise tax on foreign-to-foreign retrocession transactions.
Section 4371 imposes an excise tax on insurance and reinsurance transactions involving policies on certain identified U.S. risks that are issued by foreign insurers or reinsurers. At issue in the case before the D.C. Circuit was whether the retrocession transactions between the taxpayer (a foreign reinsurer) and the foreign reinsurer to whom the taxpayer ceded reinsurance was subject to federal excise tax.
The IRS’s position regarding this type of transaction, set forth officially in Rev. Rul. 2008-15, was that a “cascading” federal excise tax can be imposed on such foreign-to-foreign retrocessions. The D.C. Circuit, however, concluded that the foreign-to-foreign retrocession at issue in the case was not subject to the federal excise tax. Validus Reinsurance, Ltd. v. United States, 786 F.3d 1039 (2015)
With today’s release of Rev. Rul. 2016-3, the IRS stated that it will no longer apply the 1% excise tax imposed by section 4371(3) to premiums paid on a policy of reinsurance issued by one foreign reinsurer to another foreign insurer or reinsurer under the situations described in Rev. Rul. 2008-15.
In revoking Rev. Rul. 2008-15, today’s release states:
No inference should be drawn that the revocations of Rev. Rul. 2008-15 affects the liability for excise tax under section 4371 on any other policies of insurance or reinsurance. For example, absent a foreign reinsurer qualifying for a treaty wavier or an exemption from tax under section 4373(1), the IRS will apply a one-percent excise tax under section 4371(3) to reinsurance premiums paid on a policy of reinsurance…issued by that foreign insurer to either:
(i) a foreign insurer that has elected to be treated as a domestic corporation under section 953(d); or
(ii) a foreign insurer or reinsurer that is exempt from excise tax on the premiums it receives under section 4373(1) because the premiums are effectively connected to the conduct of a U.S. trade or business and taxable under section 882(a).
Rev. Rul. 2016-3 also provides that the IRS also will continue to enforce the provisions of treaties that place limits on the availability of a treaty waiver for premiums paid to a foreign insurer or reinsurer.
The IRS has not indicated when it will finish processing pending refund claims on cascading excise taxes that were previously paid.
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