SOURCE: Foreign Insurance Excise Tax - Audit Technique Guide, April 2008, as found at http://www.irs.gov/businesses/small/art ... 63,00.html NOTE: This document is not an official pronouncement of the law or the position of the Service and can not be used, cited, or relied upon as such. This guide is current through the publication date. Since changes may have occurred after the publication date that would affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date.
Chapter 11 - Claims
Taxpayers are aware of their rights in receiving refund of excise taxes paid. This chapter includes a discussion of the various types of foreign insurance claims. The chapter also includes steps to aid in the determination of the validity of each type of claim.
Procedures for All Claims
Certain information is required for all types of claims. First, determine whether the person filing the claim is the person who filed the Form 720 and remitted the foreign insurance excise tax on the original premium payment to the foreign insurer. If the person filing the claim is other than the person who filed the Form 720 and remitted the tax, determine whether the specific treaty, an IRS notice, or revenue procedure permits such person to file the claim. Second, confirm that the claim was timely filed. Third, verify the amount of the claim. Ensure the computation of the original tax paid and the tax claimed utilize the correct tax rates.
Types of Claims
There are five types of foreign insurance claims:
Claims based on treaties with the United States.
Claims based on the election to treat a controlled foreign corporation as a domestic corporation (Section 953(d) election).
Claims based on a captive subsidiary.
Claims for foreign insurance policy coverage not subject to excise tax.
Claims for foreign insurance covering products exported from the United States.
Specific procedures to determine the accuracy of a claim for foreign insurance excise tax differ depending upon the type of claim filed. Once the type of claim is determined, the excise agent may use the guide below to determine whether the claim is to be allowed, disallowed in part, or disallowed in full. Each step taken is to be documented in the agent’s workpapers.
Claim Based on Treaties with the United States
A claim will occur when a taxpayer has paid premiums to a foreign insurer located in a treaty country. Subject to the foreign insurer meeting all requirements, the transaction would be exempt from foreign insurance excise tax. However, the excise tax on these premiums was reported and paid to the Government at the time of the premium payment. Therefore, the taxpayer is allowed a refund for the error in paying tax on exempt premiums. A change in the excise tax treaty status of the country where the insurer is residing would also create a claim situation.
In order to file a claim for refund of foreign insurance excise tax, the insurer or reinsurer must be a resident of a treaty country. It is important to determine whether the tax exemption for the country in question is in effect as well as determining the type of exemption. This is done either by a review of the tax treaty itself or by a review of the treaty reference sheet.
For a qualified treaty exemption, verify that the insurer or reinsurer has satisfied the Residency and the Limitations on Benefit provisions in the applicable treaty or has a closing agreement applicable for the claim period.
Claim for Election to be Treated as a Domestic Corporation
A claim will be filed when a foreign insurer or reinsurer elects and receives permission to be treated as a United States corporation for income tax purposes under IRC § 953(d). Another election is available under IRC § 953(c), but is seldom used by foreign insurers. Either election must be requested from and granted by the Internal Revenue Service. Once accepted, the election is valid starting in the income tax year for which it is made. A copy of the § 953(d) election statement stamped as accepted by the Internal Revenue Service is to be requested to verify the claim. In addition, ensure that the period of the claim is within the time frame that the election is valid.
An agent may contact the Foreign Insurance EIS to verify that a § 953(d) election is valid. However, it is the responsibility of the claimant to have the proper documentation in their possession when filing the claim.
Claim Based on Examination of a Captive Subsidiary
A parent company establishes a wholly owned captive insurance company in a taxable foreign country. During the course of the income examination, the income agent determines that the risks insured by the insurance subsidiary are actually self-insurance. The insurance subsidiary is not considered to be a true insurance company. Therefore, the premiums paid to the insurance subsidiary are not taxable as no insurance exists.
If the taxpayer does not agree, the taxpayer will file a protective claim for the excise taxes paid on the original payment of the insurance premiums to the captive. If the taxpayer does agree with the income tax determination, the taxpayer will file a claim for refund of the excise taxes paid with the original premium payments to the captive for the quarters affected by the income tax examination.
For both agreed and unagreed claims with this issue, the following steps are to be taken to verify the validity of the claim. Each step is to be documented in the agent’s workpapers.
First, ensure that the time period of the claim is within the time period that the captive is not treated as an insurance company.
Second, verify with the income agent and/or the international agent that the income deduction for the premiums paid to the captive foreign subsidiary are disallowed. Thismust be coordinated with the agent on the case. Do not disallow or allow the claim without this verification. It is also important to determine whether the income issue is agreed or unagreed.
For unagreed income cases, the case will be forwarded to Appeals. Appeals will consider whether the premiums paid to the captive are allowable expense deductions for the parent, thereby determining whether the premiums are paid for true insurance and are subject to excise tax. Therefore, the taxpayer will file a protective claim for the excise taxes previously paid to the captive. If the premium deductions are not allowed, such premiums are not subject to excise tax.
If the income issue is still in Appeals, the claims should not be suspended until the issue is resolved. All such claims should be disallowed in full and closed for processing, by securing a signature on Form 5384 or Form 3363, and on Form 2297 waiver.
To protect the taxpayer’s interest in case the transactions are later held to be self-insurance, a Form 907, Agreement to Extend the Time to Bring Suit, is secured from the taxpayer. Authority for use of the Form 907 is in IRM Handbook No. 184.108.40.206.4.
Foreign Insurance Policy Not Subject to Tax
These types of claims assert that the insurance risk is not subject to the foreign insurance excise tax based on an exemption. An example is where the premiums are subject to U.S. income taxes under IRC § 4373. Documentation establishing that the insurance policy is exempt from the excise tax on foreign insurance is to be secured from the claimant.
Foreign Insurance Covering Products Exported from the United States
These claims are based on the 1996 Supreme Court ruling in United States v. International Business Machines, 517 U.S. 843, 96-1 USTC ¶ 70,059 (1996) (“IBM” claims). The IBM case held that the excise tax may not be applied to foreign insurance premiums paid with respect to insurance covering risks associated with goods actually in export transit from the United States.
Per IRS Notice 96-37, 1996-2 CB 208, filing Form 8849 is the only means by which a taxpayer may claim a refund for an IBM claim. A refund may not be claimed by means of a credit against another tax liability, or as an adjustment on Form 720.
To verify the claim, documentation establishing that the insurance policy is exempt from the excise tax on foreign insurance is to be secured. In the case of a policy covering risks in addition to goods in export transit, the claim for refund must be accompanied by documentation establishing the portion of the excise tax attributable to premiums paid only for insuring goods in actual export transit from the United States. Cite: Notice 96-37.
In addition, verify that the goods were actually exported. Review the export documents filed with Customs. Request and review the insurance policy to ensure that the policy covers goods during export transit.