An Ever-Complex Global Tax Environment Requires Strong M&A Risk Solutions
Today’s global tax environment grows ever more complex. Tax insurance is a potential solution to help provide certainty and protect value in M&A transactions.
Key Takeaways
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International tax structures and their legal, financial and business implications have grown rapidly in complexity.
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Risk of a potential tax challenge can stand in the way of a successful M&A deal.
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Tax insurance can address uncertainty from tax complexity by transferring the risk of successful tax authority challenges to the insurance markets.
Merger and acquisition dealmakers face a variety of economic headwinds as global M&A activity seeks to rebound in 2023 after a 35 percent decline during the first nine months of 2022.1 Further, an ever-complex international tax environment is creating additional complexity and uncertainty, requiring companies to not only heighten scrutiny in tax due diligence, but seek new ways of mitigating deal-related tax risks.
Today’s international tax structures and their legal, financial and business implications have grown rapidly in both size and complexity, and the impact of an unexpected tax challenge can significantly compromise the value from a deal. Of global significance:
- In the last decade international revelations around tax evasion and aggressive tax planning led G20 countries and the Organization for Economic Co-operations (OECD) to address these issues through Base Erosion and Profit Sharing (BEPS) 1.0, published in 2015.
- Its potential successor, BEPS 2.0 and its pillars one and two, addresses tax challenges arising from the digitalization of the economy. The OECD expected BEPS 2.0 to be delivered as early as 2020. While it has been agreed upon by participating countries it has yet to be implemented. Of note, pillar two would require multinational businesses with revenues higher than EUR750 million to pay at least 15 percent tax in each jurisdiction in which they operate. This would likely have wider-reaching consequences for international M&A activity as it would have an uneven impact on the attractiveness of different target companies and may favor certain types of bidders over others.
- Tax authorities in a number of international jurisdictions are scrutinizing transactional activity, particularly in relation to private equity capital structures. As a result, tax due diligence is critical, both for improving buyer visibility on deal-related tax risks and mitigating any potential valuation impact.2
- In the U.S., meanwhile, as the IRS staffs up amid an $80 billion funding boost, corporations and business owners are bracing for the possibility of more IRS audits and enforcement. This influx of funding is an overdue correction for the agency, which has endured steep budget cuts over the past decade.3
It’s no wonder then that tax risk is on the rise in the minds of dealmakers. Half of those surveyed warn tax risk is now significantly more acute to deal success than in the past, according to Aon’s M&A Risk in Review 1H 2022. Dealmakers also warn of growing tax risks on multiple fronts. More than a quarter (28 percent) name the proliferation of anti-abuse rules as their most pressing concern. Others include entity classification rules and increases in tax rates.4 Fortunately, there is a way to mitigate these risks, and other M&A-related tax exposures as well.
Tax Insurance as an Evolving Risk Management Tool
Tax insurance and other forms of contingent risk insurance are some of the evolving M&A strategies being implemented in response to emerging trends and changing market needs. Tax insurance is a potential solution to tax complexity that transfers the risk of successful tax authority challenges to an insurer.
Its usage has grown in M&A as a precautionary measure against unexpected tax assessments, clawbacks of anticipated tax benefits and future cash outlays. Tax insurance was designed to help protect businesses in the event a position fails to qualify for its intended tax treatment, and can be used to mitigate risk in a variety of transactional situations:
- To cover losses including taxes payable, interest and penalties, and gross-up amounts for tax due on insurance proceeds. It can also cover contest costs tied to the defense of the position.
- To protect buyers from unanticipated pre-closing tax liabilities on positions inherited from sellers in an M&A transaction. It has also been popular among renewable energy investments involving tax credits to protect anticipated tax benefits.
- In the case of an acquisition of a target with a large potential tax exposure, tax insurance can help move both parties past a difficult or even insurmountable negotiation.
- As a strategic financial tool, tax insurance can benefit a seller looking to cover its indemnity obligation for pre-close tax exposures or allows a buyer to insure itself against a heightened tax issue rather than seek a special indemnity that can hinder the deal.
- As a financial planning tool, it can provide a backstop should an investment or tax position fail to qualify under different interpretations by covering assessed amounts (tax, interest, etc.) and defense costs to make the policyholder economically whole.
Tax insurance appetite extends beyond M&A activities to non-transactional corporate risk as well. That can include corporate tax planning, restructurings, and high net worth personal or estate tax exposures.
50%
Global dealmakers who view tax risk as acute to M&A deal success.
Source: M&A Risk in Review 1H, 2022
M&A Tax Insurance: What Success Looks Like:
Transfer pricing across multiple jurisdictions
A business was exiting a global joint venture but retaining the U.S./Canadian operations of its business. In connection with the transaction, the existing transfer pricing model was terminated, and a new model was implemented with its former partner for use with certain intellectual property.
Revising the intellectual property structure included termination of existing licensing agreements, entrance into new licensing agreements, and assignment of certain intellectual property/“know-how” to which minimal value was attributed. The business was also treating the entrance into the new licensing arrangements as a “sale” of intangibles allowing it to amortize its basis. Due to the complexity and large potential exposure, the business was seeking protection for the transfer pricing involved in the transaction. The broker was able to structure and secure a $280 million tax insurance program with A-rated or better insurers, protecting the business from potential transfer pricing adjustments on the actions taken to revise the intellectual property structure across multiple jurisdictions as well as other tax risks associated with the transaction.
In the event of a successful tax authority challenge, the insurance would cover the additional withholding and/or income taxes, plus interest and penalties, in U.S. dollars, Euros, or Canadian dollars, depending on the relevant jurisdiction.
How Tax Insurance Helped Multinational Group Reorganization in the EU
A multinational company sought to re-domicile intellectual property from one EU jurisdiction to another. Its tax advisors developed the transaction steps plan and were confident that the transaction would not give rise to capital gains tax, corporate tax or stamp duty as various exemptions should apply.
Due to the complexity of the transaction steps and criteria for exemption qualification, the business used tax insurance to protect against a successful challenge to the tax-free nature of the transaction. Use of tax insurance was “baked in” to process from its earliest planning stages.
The business was then able to complete its restructuring and has a “sleep easy” that no unexpected and catastrophic tax event will occur in future as a result.
1 M&A rebound unlikely in 2023 after 35% slump: S&P Global
2 Maximizing Deal Opportunities with M&A Insurance in a Buyer’s Market
3 Tax Insurance May Serve as a Salve to Fears of IRS Enforcement | Bloomberg Tax
Talk With Us
If you would like to discuss any aspects of these insights please do not hesitate to get in contact with our team.
David McCann
Executive Director, M&A and Transaction Solutions - EMEA
[email protected]
Jessica Harger
Managing Director, M&A Transaction Solutions – North America
[email protected]
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NIS2 Compliance Readiness for Organizations across the European Union
The expansive scope, stringent sanctions and pivotal role of management related to the new NIS2 Directive provide a strong foundation to protect against evolving cyber risks.
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Article 8 mins
London Insurance Market: Unveiling Demands for New Skills in 2024
The London insurance market seeks a generation of game-changers who can navigate uncertainties and drive innovation to ensure the industry’s future success in a digitalised world.
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Article 3 mins
Better Decisions in Trade, Technology, Weather and Workforce
From global supply chain risks to climate insecurity, organizations face challenges and complexities on a scale rarely seen before.
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Article 15 mins
How Artificial Intelligence is Transforming Human Resources and the Workforce
Artificial intelligence is having a measurable impact across all aspects of HR — from talent management to compensation, health and benefits, and retirement planning. To effectively harness the technology, HR leaders must ensure both their own teams and the wider workforce are prepared.
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Article 3 mins
Risk Capital and Human Capital Perspectives
Risk Capital CEO Andy Marcell and Human Capital CEO Lambros Lambrou discuss how innovations in Risk Capital and Human Capital can help organizations boost resilience and navigate volatility.
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Report 15 mins
Wide-Ranging Trade Issues Confront Global Businesses on Multiple Fronts
Global business leaders highlight risks linked to trade as some of their top concerns — both physical and financial. While the topic is complex and broad, there are opportunities that business leaders can pursue to stay ahead of emerging trade dynamics.
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Report 16 mins
Climate Analytics Unlock Capital to Protect People and Property
Extreme weather and a changing climate are impacting many of the risks businesses face today. To address future exposures, organizations will need advanced climate and natural catastrophe models and expertise that can assess chronic and acute risks.
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Report 14 mins
A Workforce in Transition Prepares to Meet a Host of Challenges
Engaging a changing workforce requires data and innovation. Workers increasingly expect more than just a paycheck. In response, organizations are balancing costs with the ability to provide a compelling employee experience.
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Case Study 3 mins
How Aon Helped M&G Wealth Develop New Advisor Skills
Aon partnered with UK financial advice firm M&G Wealth to help the firm better understand the make-up of a highly successful advisor of the future, including the skills needed given shifts in societal needs, technology and regulation.
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Article 8 mins
Energy Transition Investments: How Advanced Analytics Can Empower Organizations
Advanced analytics can empower organizations with deeper insights into the risks and opportunities surrounding renewables, while also supporting energy transition investment.
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Article 17 mins
Q1 2024: Global Insurance Market Overview
Positive performance in 2023 fueled insurer growth ambitions but underwriting remained disciplined in the first quarter of 2024.
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Article 12 mins
How Life Sciences Build Robust Talent Pipelines in the Age of Digitalization
While digitalization is delivering transformational change to R&D across the sector, it is also rapidly reshaping recruitment and retention strategies.
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Alert 6 mins
U.S. Federal Trade Commission Bans Employee Noncompete Agreements; Here’s What Employers Should Know
The FTC has announced a rule that bans noncompetes and clauses that have a similar effect. While the rule will face legal challenges, employers should take steps now to prepare for an environment where they cannot use noncompete agreements.
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Article 7 mins
Managing Construction Risks: 7 Risk Advisory Steps
Risk advisory services can help construction stakeholders navigate uncertainties, optimize performance and drive growth in their projects.
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Article 9 mins
Floating Offshore Wind Unlocks New Opportunities and Challenges
While there are similarities in the risk profile of floating offshore wind and bottom-fixed offshore wind, challenges like unproven technology and tow-to-port strategies for maintenance require a collaborative approach between owners/developers and their insurance partners.
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Article 4 mins
Parametrics Unlock Solutions For Future Risks
Macrotrends are transforming our world and creating emerging property-casualty exposures, which will have profound implications for the insurance industry.
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Article 7 mins
U.S. Cyber Insurance: Market Trends and Opportunities
Understanding market trends and future projections in an evolving cyber insurance market is paramount to strengthening risk mitigation and transfer strategies.
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Article 5 mins
How Climate Modeling Can Mitigate Risks and Improve Resilience in the Construction Industry
In an era of escalating climate-related challenges, the construction industry is turning to advanced climate modeling to fortify its risk management strategies.
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Article 14 mins
How Technology Will Transform Employee Benefits in the Next Five Years
Advances in technology will not only transform healthcare and treatment outcomes — benefit offerings, access to care, diagnosis, treatment and affordability challenges will also be radically changed. Here is what to expect as these efforts take shape globally.
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Article 10 mins
Key Trends in U.S. Benefits for 2024 and Beyond
As healthcare costs continue to rise, employers are struggling to balance cost control with attracting and retaining talent. The results of Aon's 2024 U.S. Health Survey point to key strategies organizations are using to help.
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Article 11 mins
Capturing Carbon on the Critical Pathway to Net Zero
As the world races to reduce climate risks and limit CO<sub>2</sub> emissions, the demand for scalable and cost-effective decarbonization technologies is increasing. Carbon capture projects form an important part of the low carbon energy transition, bringing both challenges and opportunities.
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Article 7 mins
Protecting North American Contractors from Extreme Heat Risks with Parametric
Growing extreme heat conditions have escalated risks, delays and costs for the construction industry in North America. Parametric insurance can help protect against such risks, offering contractors and building owners agility, efficiency and flexibility.
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Article 9 mins
How Insurance Can Help Hedge Potential Exposures Under the New Unified Patent Court System
The launch of the Unified Patent Court allows for a new patent filing process across Europe using a centralized system. While this brings significant financial and operational benefits, navigating these changes will demand a robust litigation risk management strategy.
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Article 8 mins
Parametric Can Help Mitigate Extreme Heat Risks for Contractors in EMEA
Construction projects in EMEA are often impacted by extreme heat, leading to project delays and increased costs. Many heat exposures are excluded by traditional markets, however, parametric is a flexible solution that can help mitigate these risks.
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Article 12 mins
Understanding and Preparing for the Rise in Pay Transparency
New regulations in the U.S. and Europe will require companies to be more transparent about their pay practices. Combined with willingness among workers to talk about salary, the era of pay transparency is here.
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Article 11 mins
Advancing Women’s Health and Equity Through Benefits and Support
As companies tailor their health and benefits to meet the needs of their employees, vital areas for support include family building and menopause.
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Article 7 mins
Unlocking Capacity and Capital in a Challenging Construction Risk Market
Complex market dynamics in the construction industry are pushing organizations to proactively explore alternative risk transfer solutions, including parametric insurance and captives.
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Article 11 mins
Securing Human Capital in Natural Resources
As new job roles and technologies emerge in the natural resources industry, employee expectations are also shifting. Leaders must rise to the challenge of securing talent to meet the world’s future energy needs.
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Article 5 mins
Navigating Cybersecurity Risk Under New U.S. Rules
Rulemaking from the Securities and Exchange Commission (SEC) highlights the importance of company transparency with investors and regulators around risk management and the impact of cyber events.
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Article 13 mins
Building Growth From Uncertainty in Financial Institutions
Five ways financial institutions can balance investment with prudence in an uncertain economic climate.
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Article 12 mins
Q4 2023: Global Insurance Market Overview
An increasingly interconnected and complex risk landscape continues to shape risk strategies and market responses.
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Article 13 mins
Top Risk Trends to Watch in 2024
To be successful, business leaders must keep pace with the key trends that will impact the risk and insurance landscape in 2024.
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Article 9 mins
How to Navigate Contractor Shortages in the Energy and Power Industries
Taking a new approach to talent management and planning for worker shortages can help businesses in the energy and power industries build greater operational resilience.
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Article 8 mins
Driving Inclusion and Diversity with Employee Benefits
As organizations build diversity, equity, inclusion and belonging in the workplace, they must also ensure benefit plans are designed and customized to meet the needs of a diverse workforce.
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Article 11 mins
How Investors are Making Better Decisions Amid a Changing Climate
For investors, climate change means navigating uncertainties and understanding a wide range of potential outcomes.
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Article 8 mins
Understanding Freeze Risk in a Changing Climate
Extreme cold and freeze were responsible for $15 billion worth of structural damage in recent years, as well as business interruption and supply chain impacts. We explore the threat chronic hazards pose and consider the influence of climate change on business.
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Article 7 mins
4 Steps to Help Take Advantage of a Buyer-Friendly Directors' & Officers' Market
The global D&O market remains soft, creating a favorable environment for buyers. With abundant capacity and increased competition, capitalizing on conditions now is critical as rates are showing signs of moderating.
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Article 17 mins
Five Big Human Resources Trends to Watch in 2024
It's never been more important for HR leaders to help shape and support the execution of business strategies. However, to be successful in today’s volatile world, HR teams must stand ready to understand and harness five fast moving trends.
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Article 9 mins
Managing Reputational Risks in Global Supply Chains
Supply chain disruptions can have serious reputational repercussions, causing plummeting shareholder value and diminished stakeholder trust. The potential fallout underscores the need for management strategies that collectively address these risks.
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Article 13 mins
Creating Operational Resilience Amid Growing Risks in the Food, Agribusiness and Beverage Industry
To feed a growing global population, FAB organizations must build operational resilience to overcome supply chain, cyber, geopolitical and climate risks.
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Article 10 mins
Seizing Opportunity in a Booming Pension Risk Transfer Market
Businesses considering pension risk transfer to mitigate volatility should prepare now to be well-positioned for market opportunities.
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Article 7 mins
How Collective Retirement Plans Help Support Financial Sustainability
Improving retirement plan governance is crucial during economic uncertainty. Collective retirement plans, like a pooled employer plan, reduce risk and streamline administrative expenses for employers while also boosting employee support.
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Article