Tax Insurance
What is tax insurance?
Today’s tax structures and their legal, financial and business implications have grown rapidly in both size and complexity. The impact of an unexpected tax challenge can significantly compromise the value of a deal or adversely impact the benefit of non-transactional tax planning.
Why is tax insurance important?
It’s about certainty. Tax insurance is designed to protect you in the event that a transaction or business operation fails to qualify for its intended tax treatment under US or global rules. Aon can help parties – whether M&A buyers and sellers, investors or companies not involved in a deal – transfer these exposures to a third party, thereby reducing execution risk and increasing both parties’ confidence that they are protected and returns will be maximized.
What does tax insurance cover?
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Mergers and Acquisitions
A large tax exposure can present a challenging or even insurmountable obstacle in a deal negotiation, particularly if it will take many years to resolve. Tax insurance can be used to provide certainty and allow a buyer and seller to move past a difficult negotiation over an uncertain issue and close a deal. As a strategic financial tool, tax insurance assists a seller looking to backstop its indemnity obligation for pre-close tax exposures, or allows a buyer to insure itself against a sensitive tax issue rather than seek a special indemnity that can hinder the deal.
In a transaction, tax insurance complements representations and warranties insurance, which includes protection against unknown breaches of the tax representations and the pre-closing tax indemnity. Where a material, known tax risk has been identified that results in an exclusion to representations and warranties coverage, tax insurance is an accepted means to transfer that risk away from the buyer and seller.
- Complex deal tax planning
- Known or identified tax risks
- Buy or sell side
- Available at pre or post-closing
- Resonable and defensible positions subject to specific underwriting
- RWI exclusions
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Tax Planning
- Corporate risk management with respect to tax positions
- Protect cash flow and liquidity management
- Offset balance sheet risk
- Family office and estate planning
- Transfer pricing
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Tax Credits
Tax credits are a staple of the federal and state government’s toolbox to encourage a variety of social or environmental investments. For tax equity investors, a key incentive to invest in these projects is monetizing the associated tax credits, which, in turn, provides a source of funding for the development of the projects. Tax equity investors can also help secure coverage to protect against retroactive change in law and nonperformance by state and local governments with respect to refundable tax credits.
The 2022 Inflation Reduction Act has spurred tremendous growth in appetite globally for investments in US renewable energy projects. Tax credit insurance is a vital deal tool to manage tax risks in renewable energy transactions.
- Tax equity investing in renewable energy (solar and wind, battery storage, ITC/PTC)
- Inflation Reduction Act – Transferable Credits
- Section 45Q Carbon Sequestration; 45x manufacturing credits
- Other Federal tax credits: Low income housing, historic, new market, etc.
- State and local tax credits
Tax insurance outside of transactions
Businesses can benefit from the strategic use of tax insurance to manage their contingent tax exposures even when there is no transaction involved. The insurance market has matured, and with it our insurers’ willingness to entertain tax risks without a transaction – allowing tax insurance to be used as simply a corporate risk management tool in certain instances.
Tax insurance can be viewed as an alternative to a private letter ruling, helping protect a company from exposure from future challenges from the IRS or another foreign, state, or local tax authority. While private letter rulings are often unavailable or prohibitively time consuming, tax insurance can provide an efficient and cost-effective option. A process that can take a year or more is streamlined into approximately two or three weeks of underwriting, while still providing economic certainty as to a company’s tax positions and mitigating balance sheet risk.
Insurable Non- Transactional Tax Risks:
- Tax-Free Spin-Offs
- Tax-Free or taxable reorganization & resturctings
- Capital vs. Ordinary Income
- Debt vs. Equity Treatment
- Transfer Pricing
- Estate Settlments
The Aon Difference
Aon's Tax Risk Solutions Group Brings Unparalleled Expertise
As the leading global tax insurance broker, Aon’s tax insurance team delivers an unparalleled depth of knowledge and experience to effectively guide clients in helping protect against an adverse tax ruling that can compromise the value of a transaction, a tax equity position, or corporate earnings.
Our team has been instrumental in the growth of tax insurance, and we pride ourselves on being both pioneers in this industry and continual innovators.
Your deal is supported by a global team of experienced tax lawyers and deal professionals who expertly manage your deal through the entire process.
$65B
Since 2017, Aon's global tax insurance practice has placed over $65 billion in total limits counting for over 900 total policies, including many providing more than $500 million in limits.
