Blog Details

When U.S. businesses or individuals secure insurance or reinsurance from foreign providers, they often overlook tax reporting of one important item—the Foreign Insurance Excise Tax. This is the excise tax that is administered through IRS Form 720-Quarterly Federal Excise Tax Return, required under IRC Section 4371, and applicable to foreign insurance transactions. Let’s delve into what you need to know about this to be compliant and avoid penalties.

The Foreign Insurance Excise Tax is an excise tax upon premiums paid to foreign insurers and reinsurers. Specifically, it is levied on:

* 4% on premiums for casualty insurance and indemnity bonds

* 1% on reinsurance premiums

* 1% on life insurance, sickness, and accident policies

The tax is applied regardless of whether the foreign insurer has any physical presence in the U.S. The critical factor is whether the policyholder is located in the U.S. or the insured risk is located in the U.S.; if so, the tax applies, regardless of how far the insurer is. 

The requirement to report and remit excise tax lies on the actual premium payer. This includes:

* U.S. businesses purchasing foreign casualty or property coverage.

* Individuals buying life insurance from offshore providers.

* Reinsurers ceding risk to foreign insurance companies. 

Failure to file Form 720 on a quarterly basis could attract financial scrutiny from the IRS with penalties and interest.

To maintain compliance, the taxpayer will:

1. Use IRS Form 720 and go to Part II – Foreign Insurance Taxes

2. State the amount of premiums paid to foreign insurers in the quarter.

3. Either applies the 1% or the 4% excise tax rate correctly.

4. Then remit payment electronically via EFTPS or by mailing it to the IRS.

Maintain thorough documentation of all premium-related transactions, including the insurance policy and proof of payment, just in case of an audit.

Many taxpayers unknowingly miss filing Form 720, having been led to believe that:

* The foreign insurer does not operate in the United States; therefore, these laws are not applicable.

* "It's just reinsurance, not direct insurance."

Such misunderstandings lead to non-compliance. Therefore, work with an advisor who specializes in cross-border insurance transactions and stay on the right track when preparing returns.

Buying insurance from a foreign carrier might save on costs, but it also brings tax obligations with it. Filing for Form 720 for foreign insurance excise taxes ensures that you stay in compliance with U.S. tax law and avoid penalties. Whether you are a multinational company or an individual with foreign insurance coverage, it's crucial that you become aware of cross-border insurance excise tax compliance.