13 February 2014
US Court Rejects Cascading Excise Tax Theory In a major victory for international reinsurers, a Federal District Court in the United States rejected the cascading excise tax theory, holding that any such excise tax paid by reinsurers must be refunded. This decision is particularly significant for international groups that include reinsurers that are located in offshore financial centers, such as Bermuda, writes Stuart King of FR Global Advisors our USbased affiliated business. The United States imposes an excise tax on reinsurance premiums paid to non-U.S. reinsurers at a rate of 1% of the premiums paid. For some time, the Internal Revenue Service expressed its view informally that the tax was due whenever a United States risk was transferred, even if it was transferred between two non-U.S. entities. Thus, if a U.S. risk was reinsured by one non- U.S. reinsurer, and then retroceded to another non-U.S. reinsurer, both transactions would trigger a liability for the tax. This position was formalized in Revenue Ruling 2008-15. The imposition of the tax by the United States was challenges by Validus Reinsurance, Ltd., a Bermuda reinsurer. Validus challenged the imposition of the tax on several grounds, including an assertion that the tax violates international law and the Due Process Clause of the U.S. Constitution. Ultimately, the court held for Validus on simpler grounds. It concluded that the statute as written only applied to reinsurance transactions, and was never intended to apply to retrocessions. The Internal Revenue Service has not yet indicated whether it intends to apply the decision, so it is not yet entirely clear whether this is the last word on the subject. Any reinsurers who have paid excise tax on retrocessions should carefully review whether they should file claims for refund of the tax, and should be aware that the statute of limitations may preclude them from filing a refund claim if they fail to do so on a timely basis. How FR Global Advisors can help • • •
Assist (re)insurers identify likely in-scope contracts, undertaking a review of retrocession arrangements to determine further actions. Provision of a management note for senior management with an explanation of course of action. Make the necessary recovery filings with the Internal Revenue Services.
Contact email@example.com or your Client Director at FiscalReps for further information.
t: +44 (0)20 7036 8070 | www.fiscalreps.com @fiscalreps FiscalReps
London office: 10 Fenchurch Avenue | London | EC3M 5BN | UK Head office: 200 Fowler Avenue | Farnborough Business Park | Farnborough | Hampshire | GU14 7JP | UK FiscalReps is a trading name of Fiscal Reps Limited | Registered in England and Wales (company number 04994134) FiscalReps®, taxbox® and taxDNA® are all registered trademarks owned by Fiscal Reps Limited