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Director’s Directive on Announcement 2008-18, FET Compliance Initiative

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
Washington, D.C. 20224

COMMISSIONER
SMALL BUSINESS/SELF-EMPLOYED DIVISION

October 24, 2008

MEMORANDUM FOR EXCISE TERRITORY MANAGERS
EXCISE GROUP MANAGERS

FROM: John H. Imhoff, Jr., Director
Specialty Programs

SUBJECT: Director’s Directive on Announcement 2008-18, FET Compliance Initiative

This Directive provides guidance to examiners auditing taxpayers participating in the voluntary compliance initiative (Announcement 2008-18) regarding foreign insurance excise tax (FET) under IRC 4371- 4374.  For purposes of this Directive, the term “Taxpayer” means a foreign insurer or reinsurer not engaged in a trade or business in the United States.  In order to receive the benefits outlined in section 5 of Announcement 2008-18, for the quarterly tax period October 1, 2008, through December 31, 2008, a Taxpayer must:

  1. Report on a Form 720 return and maintain records of any transactions of insurance or reinsurance attributable to an “insured” as defined under IRC 4372(d) or with respect to the life or hazards of a U.S. citizen or resident (collectively referred to as a U.S. Insured), to which the Taxpayer itself is directly a party. A Taxpayer is directly a party to any transaction in which it receives premiums from a U.S. Insured or pays premiums to a foreign reinsurer.  See attached examples.
  2. Pay the full amount of tax due, either with the filing of the Form 720 return or with deposits.  Failure to make timely deposits will not preclude the Taxpayer from receiving benefits under Announcement 2008-18.  However, interest and penalties for failure to make timely deposits will be assessed.

Although a Taxpayer may satisfy the above terms and receive the benefits of Announcement 2008-18, examiners are not precluded from assessing FET, including any applicable interest and penalties, on any premiums subject to tax under Rev. Rul. 2008-15 from October 1, 2008, and forward.

For purposes of determining the amount of FET due under Rev. Rul. 2008-15 with respect to premiums paid during the quarterly tax period October 1, 2008, through December 31, 2008, a Taxpayer may use the safe harbor formula, described in Example 5, to compute the FET due on the Form 720 return.  A Taxpayer is not limited to the safe harbor formula; however, the safe harbor formula is a method the IRS has determined to be an acceptable method for calculating FET on transactions covered under Rev. Rul. 2008-15.

This directive also covers nonresident agents, solicitors and brokers who pay premiums with respect to transactions described herein.  In no circumstances, however, should an examiner collect an FET liability from more than one person with respect to the same policy of insurance or reinsurance.

Taxpayers should be encouraged to submit and discuss methods for calculating FET on transactions covered under Rev. Rul. 2008-15.  Taxpayers should also be encouraged to enter into closing agreements pursuant to Rev. Proc. 2003-78, 2003-2 C.B. 1029, that may provide protection to their policy holders from FET.

This Directive is not an official pronouncement of law, and cannot be used, cited, or relied upon as such.

Any questions concerning this Directive may be directed via e-mail to SB/SE Excise Policy Analyst, Jody Angelo at jody.j.angelo@irs.gov.

Attachment 1 - Examples of Transactions Covered under this Directive

Example 1:  Transaction with U.S. Insured – No Treaty Benefits

  U.S. Insured
1st leg Taxpayer
2nd leg Reinsurer A

Facts:

Taxpayer, a foreign insurer which is not located in a country with a qualified or unqualified FET exemption in a treaty with the United States for FET on foreign insurance, issues a policy of casualty insurance to a U.S. Insured (the 1st leg transaction).   The Taxpayer reinsures all or a part of the same risks with Reinsurer A (the 2nd leg transaction).  Reinsurer A is located in a country which does not receive treaty benefits for foreign insurance FET.

U.S. Insured paid FET under IRC 4371(1) on the premiums paid to Taxpayer.

Analysis:

In order to meet the provisions of this Directive and to receive the benefit of section 5 of Announcement 2008-18, Taxpayer must report and pay FET under IRC 4371(3) on the amount of premiums paid to Reinsurer A (the 2nd leg transaction).  Taxpayer does not need to pay FET on the premiums received from U.S. Insured as U.S. Insured has already paid the tax on the 1st leg transaction.  However, Taxpayer must have documentation to support the fact that U.S. Insured paid the FET on the 1st leg transaction.

Example 2:  Transaction with U.S. Insured – Taxpayer holds a FET Closing Agreement

  U.S. Insured
1st leg Taxpayer
2nd leg Reinsurer B

Facts:

Taxpayer is a foreign insurer entitled to claim the benefits of a treaty with the United States that has a qualified FET exemption, and who has also entered into a Closing Agreement with the IRS for FET (See Rev. Proc. 2003-78, 2003-2 C.B. 1029).  Taxpayer issues a policy of casualty insurance to a U.S. Insured (the 1st leg transaction).   The Taxpayer reinsures all or a part of the same risks with Reinsurer B (the 2nd leg transaction).  Reinsurer B is a resident of a country which does not provide an FET exemption by treaty.

U.S. Insured did not pay FET under IRC 4371(1) on the premiums paid to Taxpayer on the 1st leg transaction.

Analysis:

In order to meet the provisions of this Directive and to receive the benefit of section 5 of Announcement 2008-18, Taxpayer must report, pay and maintain records with respect to FET on the following transactions:

  • The premiums paid to Reinsurer B (the 2nd leg transaction);  and
  • The premiums received by Taxpayer from U.S. Insured (the 1st leg transaction).  By reinsuring with Reinsurer B, Taxpayer has violated the qualified FET exemption and the provisions of the Closing Agreement with the IRS.  Therefore, the Taxpayer is subject to FET on the 1st leg transaction to the extent the same risks are reinsured with Reinsurer B on the 2nd leg transaction.

Example 3:  Taxpayer has no Contractual Relationship with U.S. Insured

  U.S. Insured
1st leg Insurer C
2nd leg Taxpayer
3rd leg Reinsurer D

Facts:

Insurer C, a foreign insurer entitled to claim the benefits of a treaty with the United States that has a qualified FET exemption and who also has entered into  a Closing Agreement for FET with the IRS, issues a policy of casualty insurance to U.S. Insured (the 1st leg transaction).  Insurer C reinsures all or a part of the same risks with Taxpayer who also has a Closing Agreement for FET with the IRS (the 2nd leg transaction).   Taxpayer reinsures all or a part of the same risks with Reinsurer D who is resident in a country that does not have a qualified or unqualified FET exemption in a treaty with the United States (the 3rd leg transaction).

U.S. Insured did not pay FET under IRC 4371(1) on the premiums paid to Insurer C and Insurer C did not pay FET under IRC 4371(3) on the premiums paid to Taxpayer.

Analysis:

In order to meet the provisions of this Directive and to receive the benefits of section 5 of Announcement 2008-18, Taxpayer is not required to pay FET under IRC 4371(3) for the 3rd leg transaction paid to Reinsurer D, as Taxpayer is not a direct party to the insurance transaction with the U.S. Insured.

However, Taxpayer must timely file a blank Form 720 return as described in section 4 of Announcement 2008-18 in order to receive the benefits set forth under Announcement 2008-18.  In addition, IRS Examiners are not precluded from assessing FET under IRC 4371(3), including any applicable interest and penalties, on such transactions occurring after October 1, 2008.

Example 4:  Taxpayer is not a Party to a Transaction with a Taxable Reinsurer

  U.S. Insured
1st leg Taxpayer
2nd leg Reinsurer D
3rd leg Reinsurer E
4th leg Reinsurer F

Facts:

Taxpayer is a foreign insurer entitled to claim the benefits of a treaty with the United States that has a qualified FET exemption and who also has entered into a Closing Agreement for FET with the IRS.  Taxpayer issues a policy of casualty insurance to a U.S. Insured (the 1st leg transaction).

The Taxpayer reinsures all or a part of the same risks with Reinsurer D (the 2nd leg transaction).  Reinsurer D is entitled to claim the benefits of a treaty with the United States that has a qualified FET exemption. 

Reinsurer D reinsures all or a part of the same risks with Reinsurer E (the 3rd leg transaction).  Reinsurer E is entitled to claim the benefits of a treaty with the United States that has a qualified FET exemption. 

Reinsurer E reinsures all or a part of the same risks with Reinsurer F (the 4th leg transaction).  Reinsurer F is resident in a country that does not have a qualified or unqualified FET exemption in a treaty with the United States.

U.S. Insured did not pay FET under IRC 4371(1) on the premiums paid to Taxpayer.  Taxpayer did not pay FET under IRC 4371(3) on the premiums paid to Reinsurer D.

Analysis:

In order to meet the provisions of this Directive and to receive the benefits of section 5 of Announcement 2008-18, Taxpayer is not required to pay FET under IRC 4371(1) for the 1st leg premiums paid by U.S. Insured to Taxpayer, nor is it required to pay FET under IRC 4371(3) for the 2nd leg premiums it has paid to Reinsurer D.

However, Taxpayer must timely file a blank Form 720 return as described in section 4 of Announcement 2008-18 in order to receive the benefits set forth under Announcement 2008-18.  In addition, IRS Examiners are not precluded from assessing FET under IRC 4371(3), including any applicable interest and penalties, on such transactions occurring after October 1, 2008.

Example 5:  Safe Harbor Formula

Facts:

For the taxable period October 1, 2008, through December 31, 2008, Taxpayer, a foreign reinsurer, has entered into policies of reinsurance with various foreign reinsurers resident in countries that do not have a qualified or unqualified FET exemption in a treaty with the United States.  Taxpayer paid $6,000,000 in gross premiums to such reinsurers and received $3,000,000 of premiums on insurance policies and $6,000,000 of premiums on reinsurance policies directly from U.S. insurers and reinsurers, and $15,000,000 in total premiums received.

Analysis:

The following safe harbor formula may be used by the Taxpayer to compute FET due for the quarterly tax period October 1, 2008, through December 31, 2008.

1% x (Reinsurance Premiums Paid x ((Insurance + Reinsurance Premiums Received) / Total Premiums Received)))

Definitions of safe harbor variables:

The safe harbor variables should be calculated using figures from October 1, 2008, through December 31, 2008.

Reinsurance Premiums Paid

Reinsurance Premiums Paid means the gross premiums paid in all currencies by the Taxpayer to a reinsurer that is neither a resident of the United States, nor engaged in business in the United States, nor entitled to a qualified or unqualified FET exemption in a treaty with the United States.

Insurance and Reinsurance Premiums Received

In the case of casualty insurance, Insurance and Reinsurance Premiums Received means the gross premiums received in all currencies by the Taxpayer on insurance policies covered under IRC 4371(1) and reinsurance policies covered under IRC 4371(3), if received from an Insured within the meaning of IRC 4372(d).

In the case of life, sickness, or accident insurance or annuity contracts, Insurance and Reinsurance Premiums Received means the gross premiums received in all currencies by the Taxpayer on insurance policies covered under IRC 4371(2) and reinsurance policies covered under IRC 4371(3), if received from a U.S. reinsurer or foreign reinsurer engaged in a trade or business within the United States.

Total Premiums Received

Total Premiums Received means the total gross premiums received in all currencies by the Taxpayer with respect to all insurance and reinsurance policies.

Calculation of FET under the Safe Harbor Formula

The FET for the tax period October 1, 2008, through December 31, 2008, for the Taxpayer under the safe harbor is calculated as follows:

1% x ($6,000,000 x (($3,000,000 + $6,000,000) / $15,000,000))) = $36,000

In order to meet the provisions of this Directive and to receive the benefit of section 5 of Announcement 2008-18, Taxpayer must report and pay $36,000 FET under IRC 4371(3).

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Page Last Reviewed or Updated: 21-Jul-2014