Excise Taxes and Reinsurance: Wholly Foreign Retrocessions Are Not Taxable, Part II.

This post will continue my discussion of Validus Reinsurance, Ltd. v. United States, 2015 U.S. App. LEXIS 8602 (D.C. Cir. May 26, 2015), focusing on the D.C. Circuit’s analysis of the presumption against extraterritoriality, which led it to conclude that the excise tax on reinsurance purchased from foreign insurers imposed by Section 4371 of the Internal Revenue Code did not reach wholly foreign retrocession transactions.

The D.C. Circuit began its analysis by explaining that the presumption against extraterritoriality directs a court to presume that a statute has no extraterritorial effect unless affirmative Congressional intent is “clearly expressed.” Validus, 2015 U.S. App. LEXIS 8602 at *15 (quoting Morrison v. Nat’l Austl. Bank Ltd., 561 U.S. 247, 255 (2010); EEOC v. Arabian Am. Oil Co., 499 U.S. 244, 248 (1991)). The government argued that the statute was plainly intended to have an extraterritorial effect because it only applied to transactions that were not effectively connected with the conduct of a trade or business in the United States. Id., slip op. at *16.

The Court of Appeals was not persuaded: “The government does not confront the Supreme Court’s direction that ‘when a statute provides for some extraterritorial application, the presumption against extraterritoriality operates to limit that provision to its terms.’” Id., slip op. at *17 (quoting Morrison, 561 U.S. at 265). In the Court’s view, wholly foreign retrocessions were significantly different from reinsurance contracts that involved one party that was either based in the United States or doing business here. The Court expressed concern that the government’s theory would allow the tax to compound into perpetuity through multiple levels of reinsurance without any contractual or other legal relationship with any U.S.-based entity. Id., slip op. at *17-*18.

The government argued that Congress intended to have the excise tax construed broadly, since Section 4371 imposed the tax on “each policy of insurance . . . or policy of reinsurance issued by any foreign insurer,” but the Court was not persuaded, particularly in light of the fact that similar language in the Alien Tort Statute had not been sufficient to rebut the presumption against extraterritoriality. Id., slip op. at *18-*19 (citing Kiobel v. Royal Dutch Petroleum Co., 133 S. Ct. 1659, 1665 (2013)).

The Court also concluded that neither the surrounding statutory context for the excise tax nor its legislative history supported the broad extraterritorial sweep that the government sought. Id., slip op. at *19-*23. As a consequence, the district court’s grant of summary judgment to the taxpayer was affirmed.

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