On May 26, 2015 the United States Court of Appeals for the D.C. Circuit handed the reinsurance industry a major victory over the IRS, ruling that the federal excise tax on reinsurance purchased from a foreign reinsurer does not apply where both parties to the transaction are foreign reinsurers doing business outside the United States. (Validus Reinsurance, Ltd. v. United States, No. 14-5081.) Sidley represented the successful plaintiff in the case, Bermuda-based Validus Reinsurance, Ltd.
The decision seems to spell the end of the IRS’s so-called “cascading excise tax” theory that was made official in Revenue Ruling 2008-15. One level of excise tax was already paid without dispute, when domestic property and casualty insurers bought reinsurance from Validus covering certain United States insurance risks. Under its “cascading excise tax” theory, the IRS assessed a second round of excise tax on Validus’ purchases of retrocession coverage from other Bermuda companies. Validus paid the second level tax and sued for a refund.
The D.C. Circuit held that, in light of the presumption against extra-territorial application of United States law, there was insufficient evidence that Congress intended the excise tax to apply to a transaction between two foreign parties operating outside the United States. In so deciding, the court adopted a rule consistent with the mainstream view in the reinsurance industry that the U.S. excise tax attaches to premiums when they first leave the United States, but that the tax does not continue to apply to subsequent off-shore transactions.