Tax Insurance

Protect against unexpected tax liabilities and bring certainty to deal and business outcomes

Tax insurance is designed to protect you in the event that an investment or tax position fails to qualify for its intended tax treatment. This can 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 insured position.

Similar in effect to a private letter ruling, tax insurance brings certainty to taxpayers regarding the treatment of their U.S. federal, state, local, and foreign tax positions. Tax insurance is an effective and economic means of protecting against an unexpected or significant impact on financial statements and earnings. Aon clients that have relied upon tax insurance include private equity sponsors and their portfolio companies, Fortune 500 companies, and other participants in global M&A and financial transactions.

With tax insurance, organizations can:

  • Achieve certainty absent a private letter ruling from the IRS
  • Efficiently allocate the economic risk of a tax loss
  • Avoid or reverse the financial statement impact of FIN 48 reserves
  • Mitigate counterparty credit risk in tax indemnity agreements
  • Address the small probability of significant loss
  • Replace or reduce escrow required by a seller
  • Extend or add to the survival of the seller’s escrow and indemnity for a buyer’s benefit

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 protects 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.

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.

Tax insurance can be viewed as an alternative to a private letter ruling, protecting 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 two or three weeks of underwriting, while still providing economic certainty as to a company’s tax positions and mitigating balance sheet risk. With its expanded use, the accounting treatment for tax insurance also has become clearer. Aon has been advised by a Big Four firm that tax insurance can be a means to mitigate the financial statement impact of pre-existing or a foreign, state FIN 48 reserves.

In this regard, by incorporating tax insurance into a company’s strategy, what might have had a negative P&L and balance sheet impact can be viewed as P&L and balance sheet positive.

For tax equity investors, a key incentive to investing in these projects is to monetize the associated tax credits, which in turn provides a source of funding for the development of the projects.

Because tax equity investors are passive parties to the investment, they are subject to a number of tax risks, including :

  • The investment structure not being respected
  • The transaction not qualifying for the projected tax benefits/credits
  • The loss of tax benefits through recapture

Tax insurance helps manage these risks and was identified by the IRS in Rev. Proc. 2014-12 as a preferred vehicle over guarantees by transaction parties. Tax equity investors can also secure coverage to protect against retroactive change in law and nonperformance by state and local governments with respect to refundable tax credits.


 

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The Aon Advantage

Aon was among the first to participate in this specialty market and we have worked closely with our clients to manage a wide range of tax risks.

Comprising tax attorneys and tax accounting professionals, Aon brings a depth of knowledge and passion needed to develop tailored solutions to your complex tax risks. We offer experienced guidance to help ensure that your investments are secured and that value is enhanced.

Since 2013, Aon’s U.S. tax practice has placed hundreds of policies representing over $13 billion, including several large programs over $500 million. As more “A” rated or better insurers have entered the market, the insurance capacity has grown to be an estimated $1.5 billion per risk.

Aon’s Transaction Solutions team has the largest and only dedicated tax team in North America with 6 former tax lawyers, and an expanding tax team globally.