Tax planning has grown rapidly in both size and complexity in the current economic climate, especially with the associated legal, financial and business implications. Together with this, tax rules are also famously complex particularly when business operations span multiple jurisdictions. Even with the best expert advice, companies often need to make good-faith judgement about how the rules apply to their business operations. Tax authorities might have a different judgement about how the very same tax rules apply to the operations of a company and challenge a tax position taken by the taxpayer. This results in uncertainties, which often cover multiple financial years and involve significant amounts.
Tax liability insurance seeks to reduce or eliminate the exposure of an identified tax risk, from a successful challenge to the expected tax treatment of a proposed or historic transaction by the local or foreign tax authority, by transferring the tax risk from the taxpayer to an insurer. These can be tax risks as a result of a company’s ongoing operations, group restructuring, fund flows or arising from M&A.
Tax liability insurance can help:
Where a transaction fails to qualify for its intended tax treatment;
Cover losses including taxes payable, interest and penalties, and gross-up amounts for tax due on insurance proceeds;
Tax contest costs or defence costs;
Overcome difficult negotiations when acquiring targets with a large tax exposure;
Clean exit for sellers by eliminating long-tail contingent exposures;
Benefit a seller looking to cover indemnity obligations for pre-close tax exposures; and
Allow a buyer to insure itself against a heightened tax issue rather than seek a special indemnity that can hinder the deal.
In addition to M&A transactions, tax liability insurance can also be strategically used as a risk management tool for contingent tax risks related to:
Applicability of transfer taxes
Interpretation of indirect disposal rules
Permanent establishment risks / tax residency
Availability of treaty benefits
Debt / equity classification
Availability of tax losses
Revenue / capital characterisation of gains and losses
Application of principal purpose test
General anti-avoidance rules (GAAR)
VAT / GST risks
Benefits of Tax Liability Insurance
As a dominant global tax liability insurance broker, our team of tax professionals across geographies can help you achieve confidence about the tax treatment of your deal or items uncovered through diligence.
Learn more about the strategic uses of tax liability insurance in the Tax Liability Insurance eBook.