The increased scrutiny by tax administrations and the consequent risk of a specific tax position being challenged have created uncertainties among the business community. The management of tax exposures becomes a key concern for companies, in particular in M&A deals or restructurings. A specific insurance market has emerged to cover risks related to tax issues.
Focus on an emerging product: Tax Liability Insurance
Imagine that you must proceed with a transaction or investment where there is uncertainty in the application of tax laws or inadequate time to obtain an advance tax ruling. The risk exists in that the tax treatment of the transaction is challenged by the tax authorities, potentially leading to substantial costs and liabilities.
Tax liability insurances are designed to fill the risk gap that results from uncertainty about a tax liability. As a risk transfer tool, it enables the company both to free up and to attract capital.
A customized insurance solution…
The wording of the insurance is tailor-made to cover your very specific tax exposure. Retentions are negotiable and the policy period is generally aligned with the applicable limitation period. Premium typically range between 2.5 % and 10 % of the insured limit, depending on the probability of an adverse outcome.
Coverage may address:
- expenses incurred by the insured in engaging outside legal advisers and/or accountants in order to resolve the dispute with a relevant tax authority;
- interest and insurable fines or penalties as well as additional tax payable if the dispute is lost;
- gross-up of taxes payable (ie if the taxpayer is found to have an additional tax liability, the insurance proceeds may be deemed taxable: the policy will cover any tax incurred on receiving the proceeds).
Exclusions will vary from policy to policy but will generally consist in:
- losses resulting from inaccurate facts or omission of material information given by the insured;
- criminal or fraudulent acts or intentional violations of law; and
- changes in legislation after the inception date.
… for a wide variety of tax risks
Insurance companies will consider offering insurance in respect of a very wide variety of tax risks provided they are able to review detailed advice from the insured’s financial advisers or its lawyers setting out the background, the potential tax liability and a legal analysis of the likelihood of the liability arising. Tax Liability insurance is suitable for risks turning on questions of law rather than fact and is unlikely to be available for promoter-driven, repetitive or purely tax motivated transactions, or those cases already subject to audit, litigation or on appeal from a tax authority.
Examples of risks covered by insurances include:
- whether a foreign subsidiary qualifies as a “legal entity” under local corporate income tax rules;
- whether a company meets the tests relating to an exemption or specific tax treatment;
- the risk resulting in the claw-back of a historic claim for stamp duty land tax group relief;
- the risk resulting in the tax authority questioning the validity of tax credits claimed by an entity.
When assessing a tax exposure, insurers will look at:
- the type of risk, with a preference for those in connection with or as a result of a merger, acquisition, restructuring, recapitalization… or another type of transaction that demonstrates a clear business purpose other than to achieve a particular tax result;
- the jurisdiction, preferably those politically stable, with developed legal system and a tax authority or tribunal with a recognized, accepted route of appeal and a reputation for competence, probity, fairness…;
- legal advice or opinion from reputable lawyers or tax advisers provided to the insured. They will carefully review the advice to assess its merits and also identify any weaknesses or concern;
- the likelihood of challenge from a tax authority which may be based on political climate or a tax authority’s propensity to challenge certain tax practices or target industries.
Case Study – VAT Risk
An insurance solution was sought for a scheme involving a land development incorporating the construction of a number of holiday homes. Under the scheme, the land owner and building developer (which were connected parties) entered into separate but inter-conditional contracts with the purchaser of the land – for the freehold sale of the land and the subsequent design and build services respectively (rather than a single sale of land containing completed holiday homes). Insurance was offered against the risk of a successful challenge that the sale of the land would be standard rated as opposed to VAT-exempt.
What are the strategic benefits?
- transfers an uncertain liability from the insured to the insurer;
- reduces the insured’s concerns about the potential for an adverse tax challenge;
- transforms contingent claims into a quantified insurance cost;
- can facilitate a sale or acquisition by providing certainty and managing negative financial impact;
- can preserve or enhance the value of a business or an asset;
- can be used where parties do not want or do not have time to obtain prior clearance from tax authorities.
Why chose ABIL S.A. as your risk adviser or insurance broker?
ABIL is a Luxembourg based company specialized in risk management, advisory and insurance brokerage services, focusing in particular on companies active in the financial, advisory and technological sectors, as well as on large multinationals.
ABIL will have you engaged with a selection of specialized “tax liability” insurers and will be advising in a first stage on responsiveness, experience in tax liabilities, and reputation for claims payment. We will also review your insurance contract with a particular focus on the scope of losses included and excluded, the impact of knowledge qualifiers, the term of coverage, operational restrictions and potential subrogation provisions.
We are at your disposal to address any question and respond to any request for quotation.