The Internal Revenue Service recently revoked a 2008 ruling that a 1% excise tax under section 4371(3) of the Internal Revenue Code applied to “reinsurance premiums paid by one foreign insurer or reinsurer to another.” The IRS’s shift came in the wake of the D.C. Circuit’s opinion in Validus Reinsurance, Ltd. v. United States, 786 F.3d 1039 (D.C. Cir. 2015).
In Validus, a foreign reinsurer filed claims for refund of excise taxes imposed on premiums paid to a foreign retrocessionaire. The United States argued that such reinsurance policies were within the excise tax’s scope because the risks ultimately underlying the multiple levels of reinsurance were situated within the United States. The taxpayer countered that the statute’s plain language applied only to reinsurance, not retrocession coverage. After extensive analysis of the statute’s plain language and legislative history, the D.C. Circuit concluded that the statute was ambiguous. To resolve the controversy, the court resorted to the presumption against extraterritorial application of U.S. laws. The court ruled that the excise tax did not apply because the transaction was a “wholly foreign retrocession.”
Going forward, therefore, a foreign insurer who pays reinsurance premiums to another foreign insurer likely will not have to pay the excise tax under section 4371(3) of the Internal Revenue Code, though the IRS has noted some narrow exceptions. Moreover, any foreign insurers who have paid such taxes within the statute of limitations should consider contacting counsel about the prospect of claims for refund. IRS Rev. Ruling 2016-03.