Validus tax decision may stoke political fires

The decision by a US District Court judge to knock back the IRS’s cascading tax theory as it relates to retrocessional excise tax refunds may stoke the political flames under foreign reinsurers according to Goldberg Segalla partner Jeffrey Kingsley.

He tells Bermuda:Re: “dealing with foreign reinsurers has always been a focal point in the political sphere. This may be seen as another opportunity to push these issues forward. There have been several proposals previously to make modifications to US tax code with respect foreign reinsurers— this may reignite that debate in Congress.”

The decision as it stands—which makes the excise tax imposed on retrocessional reinsurance deals refundable—is a victory for Bermuda players, according to Kingsley. Currently the most definitive decision on the issue, it will allow foreign reinsurers in any jurisdiction to claim significant amounts of tax paid back from the US government.

“Because of this decision you will likely see a steady increase of applications for refunds,” says Kingsley. “While the decision seems to be on solid footing, it will be interesting to see if it is appealed because of the precedent that it may establish.”

The government is completely within its rights to challenge the decision, and historically has done just that, but the strict language of the disputed clause limits the prospects of a successful appeal. Kingsley says, “If they lost on the cascading tax theory then the IRS may come to believe that statute is not written to their intent they could go back and ask for modifications.”

“This is a good decision for Bermuda reinsurers,” Kingsley said. “I believe the district court, when looking at the language of the statute, got it right.”