On May 26, 2015, the United States Court of Appeals for the District of Columbia upheld a lower court decision and ruled that the IRS could not impose excise tax on certain wholly-foreign retrocessions of insurance. The decision represents a second major victory for Validus, a Bermuda reinsurer. The IRS had previously imposed excise tax on nine retrocession policies Validus had with foreign retrocessionaires, and the District Court for the District of Columbia held that such tax was not permitted under the applicable statute. The facts of that case are described in greater detail in our previous blog post, available here. A copy of the new decision, Validus Reinsurance, Ltd. v. United States of America, No. 14-5081 (D.C. Cir. May 26, 2015) is available here.
The appellate Court held that the excise tax assessed against Validus, a foreign reinsurer, with respect to its retrocession contracts with other foreign insurers was not authorized by the implementing statute. After examining the plain language of the statute, the Court found the text to be ambiguous as to whether or not Congress intended to tax wholly-foreign retrocessions such as this. To resolve this ambiguity, the Court turned to the legislative history of the statute, noting the “presumption against extraterritoriality” generally applied absent apparent intent to the contrary. The Court could not find any explicit evidence of Congress’ intent to apply the excise tax to wholly-foreign retrocessions and, accordingly, applied the presumption against extraterritoriality to refuse to interpret the statute to allow the IRS to impose excise tax on wholly-foreign retrocessions.
While the case represents an important victory for Validus, the Court’s holding is significantly narrower than the District Court’s earlier decision, which determined that the IRS was prohibited from imposing excise tax on all retrocessions, not only wholly-foreign retrocessions. By limiting its holding to wholly-foreign retrocessions, the Court narrowed the District Court’s holding and left open the possibility of taxing retrocessions more directly connected with domestic insurance policies, for example, U.S. reinsurers retroceding risk to a non-U.S. retrocessionaire.
There does remain the possibility of a further government appeal of this case (for example, if another federal circuit decision results in a split in the relevant circuits), but the more narrow holding of the appeals court decision may provide a middle ground sufficient to placate both sides. We will keep you informed of further developments in this matter. In the interim, taxpayers which have paid federal excise tax on wholly-foreign retrocessions should consider seeking a refund of such taxes based upon the current holding.