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Abstract: 

On March 7, 2008, the IRS issued Revenue Ruling 2008-15, in which it reiterated its position that the insurance premium excise tax imposed by Section 4371 of the Internal Revenue Code (the “FET”) applies over and over, ad infinitum, each time a U.S. risk is reinsured with a foreign reinsurer. In addition, the IRS issued Announcement 2008-18, a voluntary compliance program pursuant to which participating taxpayers agree to pay the cascading FET for periods beginning on October 1, 2008, and the IRS agrees not to audit those taxpayers for compliance with the cascading theory of FET for periods prior to October 1, 2008. The IRS decision to attempt to enforce the cascading FET now, with no explanation, after over a decade of simultaneously claiming that the cascading FET was valid, yet failing to attempt to enforce it or even mention it in treaties waiving the FET, is unexpected, to say the least, and raises significant technical and policy issues. Moreover, if the IRS position is actually correct, the potential costs to the U.S. economy could be far greater than any additional revenue raised.

Keywords: Section 4371; tax treaties; reinsurance

Affiliations:  1: Baker & McKenzie LLP.