Foreign Insurance in Marine & Aviation: When FET Applies

The Foreign Insurance Excise Tax (FET) is levied on insurance premiums received in connection with insurance contracts underwritten by non-U.S. entities, provided that the risks covered are located in the United States. The Foreign Insurance Tax is provided for under IRC Section 4372 and targets not only foreign corporations but also non-resident individuals carrying out trade or business activities in the U.S. 

The applicability of the tax depends on the geographic location of the risk covered and/or the areas of the contract's coverage, including U.S. territorial waters and continental shelf.

Foreign Excise Tax on Insurance (FET) relates especially to marine and aviation insurance because these business areas tend to be associated with complicated international dealings. The activities carried out by marine and aviation companies normally have many jurisdictional implications, and hence the issue of risk location is important in deciding how excisable a policy of insurance is. 

In marine and aviation insurance, the policies by foreign insurers may cover activities done both inside and outside the U.S., but U.S. tax applies to the risk location in the U.S.

Read our blog on who pays the foreign insurance premiums and get details regarding who will be subject to the tax.

Aviation Policies for Domestic and International Risks

Scenario 1: Separate Policies for U.S. and Foreign Risks

When FET is Applicable:

If an aviation company takes out two separate insurance policies for its aircraft operations, one for operations within the United States and the other for operations outside the United States, the policy covering operations within the U.S. is subject to the FET. This is in line with Revenue Ruling 73-362 (1973-2 C.B. 367), where a domestic aviation company had separate policies for risks inside and outside the U.S. The policy for U.S. operations was subject to the tax, but the policy for operations outside the U.S. was not.

When FET is Not Applicable:

The policy covering operations outside the U.S. is not subject to the FET as the risk insured is located entirely outside of the United States. However, if the aircraft operates both inside and outside the U.S. under a single policy, the whole premium would be subject to tax.

Scenario 2: One Policy Covering Mixed Risks (Domestic and Foreign)

When FET is Applicable:

In cases where one insurance policy covers both U.S. and foreign risks, the entire premium is subject to the FET. This follows the precedent set in Amtorg Trading Corporation v. United States (103 F.2d 339, 1939), which indicated that when one policy covers multiple risks, as long as one of those risks occurs within the United States, the entire policy premium is taxable.

When FET is Not Applicable:

If the insurance policy explicitly excludes U.S.-based risks or operates only for foreign risks, then the policy would not be subject to the tax.

Marine Policies for U.S. and International Transit

Scenario 1: Goods Shipped from Foreign Locations to U.S.

When FET is Applicable:

For a foreign insurer providing coverage on goods shipped to the U.S., the FET applies if the policy continues coverage beyond the U.S. port of entry. As stated in Revenue Ruling 57-257 (1957-1 C.B. 417), the policy would be taxable if coverage extends past unloading at the U.S. port.

When FET is Not Applicable:

If the policy only covers the goods while in transit through U.S. territorial waters and does not extend beyond the U.S. port, the premium is not subject to the FET, as established by Amtorg Trading Corporation v. United States. The court ruled that the portion of the voyage within the three-mile territorial waters of the U.S. was "trifling," and thus the premiums paid to the foreign insurer were not subject to tax.

Scenario 2: Export Insurance

When FET is Applicable:

No FET applies to foreign insurance policies covering goods in transit from the U.S. to foreign locations. This is in line with the IBM case (517 U.S. 843, 1996), which clarified that no portion of premiums paid for insurance covering goods in export transit from the U.S. would be subject to the excise tax.

When FET is Not Applicable:

In a situation where there are goods that are intended for export from the United States, but the insurance contract insures the export transit of such goods, then the contract will not be subjected to FET. This is the standard principle laid down in the IBM case.

Scenario 1: Oil Drilling on the Continental Shelf

When FET is Applicable:

A foreign insurance contract for oil drilling on the U.S. Continental Shelf is a valid subject for FET, whether or not the drilling activity takes place inside or outside of the U.S. territorial waters. This is because, according to Revenue Ruling 56-505 (1956-2 C.B. 891), a drilling activity on the U.S. Continental Shelf will fall under the jurisdiction of FET, notwithstanding that the drilling happens outside the U.S. three-mile boundary.

When FET is Not Applicable:

The FET would not apply if the drilling operation occurs entirely outside U.S. jurisdiction and is not on the Continental Shelf.

Scenario 2: Marine Transport in Territorial Waters

When FET is Applicable:

If a foreign insurer covers goods being transported through U.S. territorial waters (within three miles of the U.S. coastline), the premiums paid are not subject to FET if the coverage ends when the goods are unloaded at the U.S. port.

When FET is Not Applicable:

If the goods are only temporarily within U.S. territorial waters and the insurance does not cover risks within the U.S., the FET does not apply, as confirmed by Amtorg Trading Corporation v. United States.

Refer to the IRS Foreign Insurance Guide to get a detailed understanding of Foreign Insurance concepts in depth.

Conclusion

In relation to insurance policies concerning maritime and aviation issues, the application of Foreign Excise Tax is determined by the place where the risk exists. Be it aviation operations within the United States or marine insurance of cargoes passing through the United States waters, the importance of the place cannot be overestimated. Make sure you have all the foreign insurance policies in compliance with the regulations set by the United States government.

File your Foreign Insurance Excise Taxes Online with the IRS-Authorized Simple720 now, and ensure your marine and aviation policies are fully compliant with the IRS regulations.