Treaty-Based Excise Tax Exemptions

Rev. Proc. 2003-78 streamlined and standardized the process for entering into a closing agreement to establish an exemption from Sec. 4371 excise taxes on premiums paid to foreign insurers or reinsurers under a U.S. tax treaty. The procedure supercedes Rev. Proc. 92-39, which required a foreign insurer or reinsurer to obtain a certificate of foreign residence from a local tax authority. This requirement has been abandoned and replaced with a penalties of perjury statement attesting to the insurers or reinsurers foreign residence. Rev. Proc. 2003-78 also provides a special closing agreement for foreign insurers or reinsurers seeking exemption under the U.S.-U.K. treaty and others that include an excise tax exemption subject to an anti-conduit arrangement limit.

Background

Sec. 4371 imposes a tax (insurance excise tax) on each policy of insurance or reinsurance issued by a foreign insurer or reinsurer for risks located in the U.S. Sec. 4374 provides that this excise tax must be paid, on the basis of a return, by any person who makes, signs, issues or sells any of the documents and instruments subject to the tax or for whose use or benefit the same are made, signed, issued or sold.

Some U.S. income tax treaties exempt policies issued by a foreign insurer or reinsurer from the tax if they meet certain requirements. Rev. Proc. 92-39 provided procedures to establish an exemption from the tax when the exemption was based on the provisions of the U.S.-Germany income tax treaty. Section 5 of that procedure extended the ruling/closing agreement procedure to foreign insurers and reinsurers in countries other than Germany, if three conditions were met: (1) the U.S. had an income tax treaty with the other jurisdiction; (2) that treaty contained an excise tax exemption provision and a limitation-on-benefits article similar to those in the U.S.-Germany income tax treaty; and (3) the treaty entered into force after May 18, 1992.

Rev. Proc. 2003-78

The new procedure simplifies the process for entering into an excise tax closing agreement with the IRS, and broadens application to all foreign insurers and reinsurers that are resident in treaty partner jurisdictions when the treaty contains an excise tax exemption provision. A person otherwise required to remit the insurance excise tax on account of premiums paid to a foreign insurance or reinsurance company may consider the premiums exempt from the insurance excise tax under an income tax treaty if, before filing the return for the tax period, the person has knowledge that there was in effect for such period a closing agreement between the IRS and the foreign insurer or reinsurer.

Under Rev. Proc. 2003-78, Section 3.04, a foreign insurer or reinsurer that wishes to enter into a closing agreement must submit all of the following documentation:

1. A statement signed under penalties of perjury that the foreign insurer or reinsurer is a treaty resident and qualifies for benefits under the pertinent treatys limitation-on-benefits article.

2. A $75,000 letter of credit in favor of the IRS issued by a U.S. bank, or by a U.S. branch or agency of a foreign bank approved by the National Association of Insurance Commissioners for issuing letters of credit.

3. Form SS-4, Application for Employer Identification Number, for applicants that do not have one.

4. A list of position titles of those persons who will be the parties responsible for performance under the closing agreement, including their names, addresses and phone numbers as of the date the application is submitted.

The request for a closing agreement must be filed in accordance with Rev. Proc. 2003-1 and submitted with a $6,000 applicable user fee. Closing agreement language is provided in appendices to Rev. Proc. 2003-78.

Filing Requirement

In the absence of a closing agreement, Form 720, Quarterly Return of Excise Tax, must be filed by the person who pays the premiums to the foreign insurer or reinsurer; that person must also pay the insurance excise tax. If the foreign insurer or reinsurer has entered into a closing agreement, that person must file Form 720 and pay any tax due; the premium payer is exempt from any filing requirement under these circumstances.

From Joseph A. Cruz, J.D., and Richard J. Safranek, J.D., Washington, DC