Insurance to mitigate Tax exposures

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.

Cyber Risks and Data Protection

 If your business involves gathering, maintaining, disseminating or storing private and sensitive information, you probably wonder to what extend you can rely on your computers, servers, clouds and software to keep all that data safe and secure.

Our dependency on ICT has never been so high and there is no doubt it will increase even further. The smallest technical problem is likely to cause delays, business interruption and damages to third parties, especially when private data is involved. At the same time, cyber criminality is becoming more and more sophisticated. Examples of remote access hacking, distributed denial of service attacks (DDoS) or ransomware are in newspapers and newsletters every single day.

With the recent approval of the GDPR (General Data Protection Regulation), which will be applicable in Luxembourg as of 25th of May 2018, Europe has come up with a stricter data protection compliance regime. In case of loss of private data, companies are now exposed to important liabilities and severe penalties (up to EUR 4 % of the global gross revenues, with a maximum of EUR 20m).

How to get ready for the GDPR?

GDPR compliance is a mandatory requirement and many entities covered by the regulation will need to introduce serious structural changes. Consultants and lawyers are ready to scan your operational systems and procedures to get you there. You will probably also consider an upgrade of your IT infrastructure and security tools to protect against cyber-attacks and system failures.

Introducing Cyber Insurance as a powerful risk mitigation tool

Although mandatory, compliance with the law will not be able to prevent cyber-attacks and the devastating effects it may cause on your reputation and liability. Even the best and most robust security tools in place will never guarantee a 100% security for the personal information you manage.

To help you mitigate those risks and add a layer of corporate protection, you would be well served to consider a “cyber insurance” policy.

Cyber insurances exist for more than fifteen years in the USA, where some states like California were subject to similar regulation. More recently, a cyber insurance market has also developed in Europe, with insurers now offering a variety of solutions to all type of companies at affordable prices.

What does it cover?

Cyber insurances are comprehensive policies that include end-to-end risk management solutions for cyber-related events.

In the first instance, the policy will provide an immediate “first response” ICT and legal support straight after a security failure or privacy breach. In practice, insureds have access to dedicated specialists (ICT, consultants & lawyers) via a call center to look at the issue, provide the necessary support and prevent any aggravation of damage.

The policy further pays the various costs incurred in dealing with the issue: costs of notifications (including to the Data Privacy Authority, in compliance with the requirements of the GPDR), public relations to mitigate the reputational loss, and other services to assist in investigating, managing and mitigating a cyber incident.

Forensic investigations, legal consultations and identity monitoring costs for victims of a breach are all included.

The insurer will also pay the necessary costs and expenses incurred to recreate lost data held by the insured.

The liability section of the policy shall cover claims introduced against the company as a result of the failure of the insured’s network security or a failure to protect data. That includes responding to regulatory actions and investigations as well as the payment of defense costs and damages of third parties (such as customers or employees).

In some instances, the policy reimburses the lost income and operating expenses consequent to a material interruption of your business operations caused by a network security failure.

Finally, the cyber theft & extortion section responds to the threat of intentional security attacks against a company by an outsider attempting to steal or extort money, securities, or other valuables.

What is NOT covered?

Cyber insurance policies will intervene in excess of a self-insured amount (a deductible). As regards business interruption in particular, coverage will be triggered after a waiting period. Both the deductible and the waiting period are a matter of negotiation with the insurers.  

The insurance sections and exclusions vary significantly from one insurer to the other. We point out the following ones in particular :

  • losses resulting from electrical or mechanical failure of infrastructure other than IT (such as optical fiber, satellite disorder or power outage);
  • damages to tangible property (i.e. other than data) and physical injuries (a carve back to this exclusion is nevertheless available to exposed industries);
  • infringement of intellectual property.

 

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.

You may count on ABIL to tailor your cyber policy to your specific needs. In order to avoid gaps, reduce overlaps and minimize insurance costs, ABIL performs a comprehensive review of your other policies such as the Directors & Officers Liability, Professional Liability, Crime, Kidnap & Ransom, Property or General & Product Liability.

We are at your disposal to address your questions on the matter and respond to any request for quotation