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ACLI Criticizes Foreign Customer Tax Rulings

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The American Council of Life Insurers, Washington, is blasting a pair of Bush administration tax rulings that could increase withholding taxes for U.S. life insurers’ overseas customers.[@@]

The first decision, Revenue Ruling 2004-75, holds that foreign investors who get income from life insurance policies or annuities issued by foreign branches of U.S. life insurance companies are getting U.S.-source income. That ruling, released in June, will force some of U.S. insurers’ foreign life and annuity customers to comply with 30% tax withholding requirements.

The ruling does not apply to residents of countries that have other provisions for life and annuity taxation in tax treaties with the United States, according to the ruling text.

The new decision, Revenue Ruling 2004-97, further softens the effect of the first ruling. It will grandfather in life and annuity income paid before Jan. 1, 2005, on contracts issued before July 12, 2004, according to the ruling text.

Meanwhile, the IRS “will carefully review the treatment of payments to which Revenue Ruling 2004-75, as amplified by this ruling, does not apply,” Gregory Spring, an IRS international tax specialist, writes in the new revenue ruling.

Payments that might not be affected by Revenue Ruling 2004-75 include payments on life insurance or annuity contracts that are “issued by a U.S. life insurance company without the substantial involvement of a foreign or Puerto Rican branch,” Spring writes.

Spring also wrote Revenue Ruling 2004-75.

Although Spring’s new ruling gives overseas arms of U.S. life insurers some relief, many nonresident alien customers still could end up facing a 30% withholding tax starting in 2005, according to the ACLI.

“The ruling penalizes companies that have branch offices in countries with which the U.S. does not have a tax treaty,” says ACLI President Frank Keating. “It penalizes the companies’ customers as well. It also makes U.S. products uncompetitive as compared to products not subject to such a tax, including products issued by subsidiaries of U.S. insurers.”

The IRS has posted a copy of Revenue Ruling 2004-97 at // and a copy of Revenue Ruling 2004-75 at //