SERVICE ISSUES GUIDANCE FOR QUALIFYING FOR EXEMPTION FROM FOREIGN INSURANCE EXCISE TAX.

Rev. Proc. 87-13

SECTION 1. PURPOSE

This revenue procedure provides instructions for establishing exemption from the section 4371 excise tax on insurance policies issued by a barbados insurer or reinsurer when the exemption is based on the provisions of the United States--Barbados Income Tax Convention (the "Convention"). This revenue procedure also applies to any other treaties providing a qualified exemption from the insurance excise tax under a Limitation of Benefits Article similar to Article 22 of the Convention.

SEC. 2. BACKGROUND

01 Section 4371 of the Internal Revenue Code imposes a tax on each policy of insurance or reinsurance issued by any foreign insurer or reinsurer.

02 Section 4374 of the Code provides that the tax imposed by section 4371 shall by paid 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.

03 Section 46.4374-1(a) of the Excise Tax Regulations provides that, in the case of premiums paid on or after January 1, 1966, the tax imposed by section 4371 of the Code shall be paid on the basis of a return. Such tax shall be remitted by the person who makes the payment of the premium to a foreign insurer or reinsurer or to any nonresident agent, solicitor, or broker. The phrase "person who makes the payment" means the resident person who actually transfers the money, check, or its equivalent to the foreign insurer or reinsurer (including transfers to any bank, trust fund, or similar recipient designated by the foreign insurer or reinsurer), or to any nonresident agent, solicitor, or broker.

04 Pursuant to treaties between the United States and several countries, policies issued by a foreign insurer or reinsurer that is a resident of any of such countries may be exempt from the tax imposed by section 4371 of the Code. One such treaty is the Convention.

SEC. 3. EXEMPTION PROCEDURE

01 A person required to remit the excise tax on foreign insurance or reinsurance on account of premiums paid to a Barbados insurance company during any taxable period may consider the premiums paid to the foreign insurer or reinsurer exempt under the Convention only if the conditions of paragraph .02 of this section are satisfied and if the Barbados insurer or reinsurer is certified by the Ministry of Finance and Planning of Barbados as having been a resident of Barbados (1) during the three months preceding the taxable period in which the premiums are paid to the Barbados insurance company or (2) during the taxable period. Such certification may be in the form of a list compiled by the Ministry of Finance and Planning of all insurers of reinsurers that were residents. A copy of such a list or of any individual certification upon which an exemption is based must be retained by the person required to remit the excise tax. The person required to remit the excise tax may not consider the policy exempt if prior to filing the return for the taxable period such person has knowledge that the Barbados insurer or reinsurer did not qualify for benefits under the Convention during the taxable period.

02 In addition, the person otherwise required to remit the tax may consider the policy exempt only if, prior to filing the return for the taxable period, such person has knowledge that there was in effect for such taxable period a closing agreement between the Internal Revenue Service and the Barbados insurer or reinsurer as provided by section 3.06. As part of the closing agreement, the Barbados insurer or reinsurer must agree to be liable as a United States taxpayer for Federal excise tax under section 4371 of the Code if it is determined that premiums paid to the Barbados insurer or reinsurer are not entitled to exemption under the Convention from the tax imposed by section 4371 of the Code.

03 A Barbados insurer or reinsurer cannot qualify for exemption under the Convention to the extent that the risks covered by the premiums it receives are reinsured with a person not entitled to the benefits of the Convention or any other convention (Article 2(1)(a) of the Convention).

04 A Barbados insurer or reinsurer cannot qualify for exemption from the section 4371 tax under the Convention, if at any time during the taxable period 50 percent or less of its shares are owned, directly or indirectly, by any combination of one or more individual residents of Barbados or the united States or citizens of the United States (Article 22(1)(a) of the Convention). In applying this test, shares that are not registered to a named shareholder of the Barbados insurer or reinsurer or of an intermediary company will be considered owned directly or indirectly by an individual who is neither a resident of Barbados nor a citizen or resident of the United States.

05 Furthermore, a Barbados insurer or reinsurer cannot qualify for exemption under the Convention, from the tax imposed by section 4371 of the Code, if its income for a taxable period is used in substantial part, directly or indirectly, to meet liabilities (including liabilities for interest or royalties) to persons who are neither residents of Barbados nor citizens or residents of the United States (Article 22(1)(b) of the Convention). For purposes of this requirement, the Service will consider the taxable period to be the calendar year or the annual accounting period used by the insurer for financial accounting purposes.

For purposes of this test, the term "liabilities" refers to payments that reduce gross premiums or are deductible against gross premiums or are deductible against gross income, including interest, royalties, and premiums paid in connection with reinsuring risks. The Service generally will not consider a taxpayer to pay a substantial portion of its income to meet liabilities to persons who are neither residents of Barbados nor citizens or residents of the United States if (1) payments to persons described in this subparagraph .05 do not exceed 50 percent of gross income for the taxable period (including investment income attributable to its insurance business but excluding investment income not attributable to its insurance business); and (2) reinsurance premiums paid to persons described in subparagraph .05 are less than 50 percent of the insurer's or reinsurer's worldwide premium income.

In the case of the test set forth in (1) above, a lesser percentage may be applied upon examination if the amount of annual reinsurance premiums exceeds 50 percent of worldwide premium income. However, payments referred to in the test set forth in (1) above will generally be considered substantial if they exceed 50 percent of worldwide premium income, regardless of the level of reinsurance.

06 A foreign insurer or reinsurer who wishes to have its policies considered exempt from the excise tax under the Convention must enter into the following form of closing agreement:

CLOSING AGREEMENT OF FINAL DETERMINATION COVERING SPECIFIC MATTERS

Under section 7121 of the Internal Revenue Code, _______________ _____________________________________________________________________ (Taxpayer's name, address, and identifying number; if taxpayer has no identifying number, indicate date of application for number) and the Commissioner of Internal Revenue make the following closing agreement:

WHEREAS, the business profits article (Article 7 of the United States-Barbados Income Tax Convention, the "Convention") exempts insurance or reinsurance premiums paid to a resident of Barbados from the Federal excise tax imposed by section 4371 et seq. of the Internal Revenue Code of 1954, as amended (the "Code") only to the extent that the Barbados insurer or reinsurer does not reinsure such risks with a person not entitled to exemption from such tax under the Convention or another convention (Article 2(1)(a) of the Convention) and only if the insurer or reinsurer qualifies under Article 22 of the Convention;

WHEREAS, section 3.02, 3.03, 3.04, and 3.05 of Rev. Proc. 87-13 provide that the person required to remit the tax should consider the policy exempt only if, prior to filing the return for the taxable period, such person has knowledge that the Barbados insurer or reinsurer has entered into a closing agreement to be liable as a United States taxpayer for Federal excise tax due under section 4371 et seq. of the Code on premiums from policies reinsured with reinsurers that are not entitled to exemption from the excise tax under the Convention or any other convention and on premiums paid or accrued when the Barbados insurer or reinsurer did not qualify under the Convention for exemption from the excise tax imposed by section 4371 et seq. of the Code;

WHEREAS, the Barbados insurer or reinsurer represents that it is and will continue to be eligible for benefits under the Convention; and

WHEREAS, the Barbados insurer or reinsurer (hereinafter referred to as "the taxpayer") wishes to have its policies of insurance or reinsurance considered exempt from tax under the Convention; IT IS HEREBY DETERMINED AND AGREED THAT;

(1) Taxpayer shall, for purposes of this closing agreement, be liable as a United States Taxpayer for the Federal excise tax due under section 4371 et seq. of the Code on premiums from policies reinsured with reinsurers that are not entitled to exemption from the excise tax under the Convention or any other convention and from policies issued or outstanding when Taxpayer did not qualify under the Convention for exemption from the excise tax imposed by section 4371 et seq. of the Code.

(2)(a) Returns of Federal excise tax due under and pursuant to this closing agreement and sections 4371 et seq. of the Code shall be made by Taxpayer, or by Taxpayer's authorized representative on Taxpayer's behalf, by filing Form 720, Quarterly Federal Excise Tax Return, for each return period covered by this closing agreement.

(b) If Taxpayer reinsures, in whole or in part, a policy of insurance or reinsurance with any person(s) not entitled to exemption from the excise tax under the Convention or any other convention or if Taxpayer issues or has outstanding a policy or policies when the Taxpayer did not qualify under the Convention for exemption from the excise tax imposed by section 4371 et seq. of the Code, the tax reportable on the return, Form 720, shall be computed on the basis of the percentage of such policy reinsured or on the basis of the premium accrued or received during the time period when Taxpayer did not qualify for exemption under the convention. For purposes of the preceding sentence, Taxpayer may consider a reinsurer to be entitled to exemption from the excise tax under the Convention or another convention if the reinsurer is a party to a closing agreement with the Internal Revenue Service under this Convention or another convention, or the reinsurer provides evidence that it is a resident of the United States or the United Kingdom.

(c) Forms 720 shall be filed with the Director, Internal Revenue Service Center, Philadelphia, Pennsylvania 19255, U.S.A.

(d) Taxpayer, or Taxpayer's authorized representative, shall make the required Federal tax deposits of the Federal excise tax in such manner and at such times as are prescribed by regulations and explained in the instructions for Form 720.

(3) Taxpayer agrees that, for purposes of determining its Federal excise tax liability pursuant to this closing agreement and for purposes of verifying Taxpayer's entitlement to benefits under the Convention, Taxpayer will maintain for a period of 5 years from the end of each taxable period to which this closing agreement applies accounts and records of items of insurance and reinsurance that will be made available upon written request by the Internal Revenue Service at the place mutually agreed upon by the Service and Taxpayer. Taxpayer will also maintain for 5 years and make available for inspection records to establish eligibility for Convention benefits, including records about payment of liabilities described in section 3.05 of Rev. Proc. 87-A. Taxpayer will be allowed 60 days, or other period of time determined as reasonable by the District Director of Internal Revenue, within which to make available its accounts and records.

(4) If it is determined that there is an underpayment in respect of any excise tax determined to be due pursuant to this closing agreement and sections 4371 et seq. of the Code, the Internal Revenue Service shall issue a statement of notice and demand for the tax due plus any interest and applicable penalties. Notice of any underpayment shall be sent to the Taxpayer at the name and address shown on the Form 720, if a Form 720 was filed for the period for which an underpayment is determined by the Internal Revenue Service, or otherwise to the Taxpayer's registered address in Barbados. Payment of all additional amounts due shall be made in accordance with the terms specified in the statement of notice and demand. Collection of such amounts not paid per notice and demand shall be in accordance with paragraph 5 hereof.

(5)(a) As security for payment of tax, taxpayer shall cause an irrevocable letter of credit to be issued by a United States bank that is a member of the Federal Reserve System in favor of the Internal Revenue Service in the amount of $_____ (amount to be agreed upon by Taxpayer and the Internal Revenue Service) or such amount as may from time to time be mutually agreed upon by Taxpayer and the Service. Such letter of credit must be in effect within 90 days of the effective date of this closing agreement.

(b) Such letter of credit may be drawn upon to the extent that:

(1) The Service issues a statement of notice and demand for any tax shown on a Form 720 (original or amended return) that is not paid with such return;

(2) Any proposed additional excise tax due has been sustained by the Internal Revenue Service Regional Director of Appeals having jurisdiction over such matter, or

(3) The time for filing a protest of such proposed additional tax due has expired, provided that the statement of notice and demand shall have been issued as provided in paragraph 4 hereof.

(c) If, after the conditions in paragraph 5(b) hereof have been met, the tax is not paid in accordance with the terms of the statement of notice and demand, collection of such amounts will be made by resorting to such letter of credit, to the extent thereof, before any levy or proceeding in court for collection is instituted against Taxpayer.

(d) If such letter of credit is drawn upon, it must be reinstated to (amount as many have been agreed upon by the Service and Taxpayer) within 60 days after the date drawn upon.

(6)(a) Solely by reason of the execution by Taxpayer and the Commissioner of this closing agreement, any person otherwise required to remit the federal excise tax on foreign insurance or reinsurance policies pursuant to section 46.4374-1(a) of the Excise Tax Regulations may consider premiums paid to Taxpayer after the effective date of this agreement as exempt under the Convention from the Federal excise tax.

(b) Taxpayer agrees that the Commissioner may disclose Taxpayer's name as an insurer or reinsurer that qualifies for exemption from the excise tax under the Convention by publication or otherwise.

(7)(a) This closing agreement shall include, as an attachment hereto, a statement from the Competent Authority of Barbados certifying that Taxpayer is a resident of Barbados as defined in the Convention and a statement from the Taxpayer that Taxpayer is not disqualified from receiving benefits under the Convention by reason of Article 22 of the Convention. Taxpayer shall submit such information in its statement as will establish its entitlement to benefits under the Convention.

(b) The statement from the competent Authority of Barbados certifying that Taxpayer is a resident of Barbados shall be effective for a period of 3 calendar years beginning with the year of receipt. Taxpayer agrees to renew the certificate of residency every three years, and its own certification of eligibility for benefits under the Convention every year, on or before the expiration date of the original certificate. Taxpayer agrees to provide an original certificate. Taxpayer agrees to provide an original and one copy of the recertification along with a photocopy of this closing agreement to:

                       Internal Revenue Service

(8)(a) This closing agreement shall be effective for the taxable period immediately following the taxable period within which the agreement is signed by the Commissioner. This agreement shall thereafter continue in effect unless terminated as provided in subparagraph (b) of this paragraph.

(b) This agreement may be terminated by either Taxpayer or the Commissioner by giving the other written notice of the notifying party's intent to terminate. The decision to terminate is solely at the discretion of the party giving such notice. This agreement shall be terminated on the last day of the return period immediately following the return period within which the written notice of termination is given.

(c) Taxpayer hereby agrees to file a return, Form 720, marked "Final Return" for the taxable period within which this agreement terminates pursuant to paragraph (8)(b) hereof and to furnish a duplicate of such "Final Return" to:

                       Internal Revenue Service

WHEREAS, the determinations set forth above are hereby agreed to by said taxpayer:

NOW THIS CLOSING AGREEMENT WITNESSETH, that the said taxpayer and said Commissioner of Internal Revenue hereby mutually agree that the determinations set forth shall be final and conclusive, subject, however, to reopening in the event of fraud, malfeasance, or misrepresentation of material fact, and provided that any change or modification of applicable statutes or tax conventions will render this agreement ineffective to the extent that it is dependent upon such statutes or tax conventions.

IN WITNESS WHEREOF, the above parties have subscribed their names to these presents, in triplicate.

Signed this (Date) day of (Month), (Year)

The request must be accompanied by three copies of the Closing Agreement with an original signature on each copy and an original and two copies of the Certificate of residency required by paragraph 7 of the Agreement.

SEC. 4. PERIODIC LISTING OF AGREEMENTS

The Service will periodically publish in the Internal Revenue Bulletin a list of foreign insurers or reinsurers that have entered into closing agreements under this revenue procedure and also those whose closing agreements are terminated so that the exemption no longer applies.

SEC. 5. OTHER TREATIES

These procedures may also be used by insures or reinsurers claiming benefits under the United States Conventions with Cyprus or any country that has a similar anti-treaty shopping and qualified exemption convention with the United States which enters into force after the effective date of this revenue procedure. The Office of Associate Chief Counsel (International) should be contacted with regard to appropriate modifications to these procedures that apply to these latter conventions. Taxpayers claiming benefits under the treaties with France, Hungary, and the United Kingdom should continue to follow Rev. Proc. 84-82, 1984-2 C.B. 779.

SEC. 6. EFFECTIVE DATE

This revenue procedure is effective April 13, 1987, the date of its publication in the Internal Revenue Bulletin.

SEC. 7. EFFECT ON OTHER DOCUMENTS

Paragraph (6)(a) in the closing agreement in Rev. Proc. 84-82, 1984-2 C.B. 779, is modified to state that the closing agreement provides an exemption from the Federal excise tax for premiums paid to the Taxpayer, rather than policies issued by the taxpayer, after the effective date of the agreement. Also, the addresses in paragraphs (7)(b) and (8)(c) of the closing agreement in this revenue procedure should be substituted for the addresses in paragraphs (7)(b) and (8)(c) of the closing agreement in Rev. Proc. 84-82. The signature of the Associate Chief Counsel (International) should be substituted for the signature of the Associate Chief Counsel (Technical) in the closing agreement in Rev. Proc. 84-82.