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Foreign Insurance Tax is an excise tax imposed on premiums paid to foreign insurers. The tax is levied on U.S. businesses that purchase insurance from foreign insurers to cover risks that fall within certain categories. This is reported on Form 720 under the Foreign Insurance Excise Tax category (IRS No. 30). Businesses that purchase foreign insurance policies, including reinsurance, casualty insurance, and life insurance, are required to report and pay these taxes quarterly.

Here’s a tabular representation of the foreign insurance premiums with their corresponding tax rates:

Yes, you do gross up your foreign insurance premiums for excise tax reporting purposes. The premium figure that is reported on Form 720 for tax purposes is the gross premium figure, not the net premium figure.

This may be new information to many people, but it is important to understand why this is so. This ensures that you are paying the right tax on this figure. If you were to report this figure as a net premium (i.e., after any discounts or chargebacks), then you would be paying less tax on it than required, which could result in penalties and interest due to underreported tax.

Let’s dive deeper into how the gross-up works for foreign insurance premiums.

The gross-up premium is the amount businesses need to report on Form 720 when calculating the Foreign Insurance Excise Tax. This is based on the gross premium paid for the insurance policy, not the net premium, as the excise tax is applied to the full amount.

To determine the gross premium, use the formula:

Gross Premium = Net Premium / (1 - Tax Rate)

Examples of Gross-Up Calculation

Example 1: Casualty Insurance (Tax Rate: $0.04)
If the net premium for casualty insurance is $100,000, the gross premium is calculated as follows:

Gross Premium = $100,000 / (1 - 0.04) = $100,000 / 0.96 = $104,166.67

So, the gross premium for casualty insurance would be $104,166.67.

Example 2: Life Insurance (Tax Rate: $0.01)
If the net premium for life insurance is $100,000, the gross premium is calculated as:

Gross Premium = $100,000 / (1 - 0.01) = $100,000 / 0.99 = $101,010.10

The gross premium for life insurance would be $101,010.10.

• Remember to disclose the gross premium amount, even if you are familiar with the net premium.

• Be sure to use the appropriate tax rate according to the type of foreign insurance policy you are handling, whether it's a casualty, life, or reinsurance policy.

• The deduction, discount, or chargeback received from the insurer should not be deducted from the premium amount when you compute the excise tax. This is very important to avoid any underreporting of the tax and to prevent any penalties from the IRS.

Read the IRS Foreign Insurance Guide to get a deeper knowledge about various factors of Foreign Insurance Taxes

Wrap:

In conclusion, when reporting foreign insurance premiums on Form 720, it is vital to gross up the insurance premiums. This ensures compliance with IRS regulations by using the correct gross insurance premium amount, which will allow the correct tax amount to be applied, depending on the category of insurance.