Refund claims on foreign insurance excise taxes.

Multinational corporations should consider filing refund claims for excise taxes imposed on certain insurance policies issued by foreign insurers. Sec. 4371 imposes a 4% excise tax on each policy of insurance or reinsurance issued by any foreign insurer or reinsurer. Recent Federal court cases and a pending Supreme Court case raise questions as to the constitutionality of this excise tax in certain situations. To keep open the statute of limitations (SOL) on these claims during the period in which the Supreme Court is considering this matter, taxpayers should immediately file protective refund claims for those excise taxes in question.

Background

The Supreme Court will review the decision of the Federal Circuit in International Business Machines Corp., 59 F3d 1234 (1995). In this case, the Court of Appeals held that the excise tax under Sec. 4371, as applied to casualty insurance on goods shipped to foreign customers, is in effect a tax on the exported goods and therefore invalid under the export clause of the Constitution.

IBM sold products manufactured within the United States to its foreign subsidiaries. The terms of the sales called for title to the products (and the risk of loss) to pass from IBM to the subsidiaries when the goods cleared customs in the foreign country. The terms of sale called for the subsidiaries to bear the cost of insuring the products against damage or destruction during shipment. In some instances, the foreign subsidiaries placed the insurance with a foreign carrier, which the subsidiary paid for directly. Both IBM and its foreign subsidiaries were listed as insured beneficiaries.

On audit, the IRS determined that IBM was liable for the 4% excise tax as a result of the policies purchased from foreign insurance companies, insofar as those policies applied to IBM products being exported from the U.S. Both the Court of Federal Claims and the Federal Circuit determined that this treatment is invalid under Article 1, section 9, clause 5 of the U.S. Constitution, which provides that no tax or duty shall be laid on articles exported from any state. Both courts relied on the Supreme Court's long-standing decision in Thames & Mersey Marine Insurance Co., 237 US 19 (1915), which held that a Federal stamp tax on policies insuring marine risks was unconstitutional as applied to shipments for export.

Action Required

If the decision in the International Business Machines Corp. case is affirmed by the Supreme Court, taxpayers who have paid excise taxes under Sec. 4371 on foreign insurance covering export shipments should be entitled to refunds equal to the tax and applicable interest on such amounts. However, in past cases, the Supreme Court has typically not protected. taxpayers for whom the SOL expired while the case was being considered. Therefore, protective refund claims for such amounts should be filed as soon as possible to avoid expiration of the SOL for those years currently open.

Where Applicable

This information will generally apply to companies that manufacture all or a portion of their goods in the U.S. and ship those goods to foreign customers or subsidiaries. The company must have previously paid the excise tax under Sec. 4371. This information could also apply to certain retail companies, distributors, shipping companies and domestic insurance companies that reinsure through foreign insurers.

Caution: If the foreign insurer is a captive insurance company, filing a refund claim could theoretically expose a client to the risk that the Service would challenge whether payments made to the captive constitute true insurance.