Comprised of complex legislation and case law, tax law is also influenced by wider jurisprudence and established practice, all of which play a role in the assessment of tax advisors who utilise scholarly opinion and commercial experience to assist clients in navigating the tax landscape. Businesses may base their investment decisions on such tax advice and will also factor it into their asset valuations. However, uncertainty in the application of tax law may delay or disrupt these decisions. For example, it might be unclear if a transaction is taxable, if an exemption applies, or if a 'low to medium' risk will result in a tax liability.
Tax insurance is complementary to the tax advice or the tax due diligence that a company may already be receiving. The tax advisor, after due consideration, might conclude that a tax ‘should’ not arise or that with the risk is low. Tax insurance creates certainty by use of an insurance policy to ensure that the tax will not arise. Or more accurately, that the liability will not be incurred by the company since if the tax is finally determined to be payable, it will be paid by the insurer.
When an investment is being considered, knowing that a risk should not come to fruition is often not sufficient grounds to proceed and when substantial capital is at stake, decision makers want to know that issues such as the tax treatment of investments will have been fully explored. Where issues are uncovered, prudent teams will often be looking to offset the impact on their balance sheet in the event that the company be determined liable for a given tax. This approach can protect cash flow (as in some jurisdictions advance tax payments are required to be paid into the revenue whilst the matter is being appealed) and insure against the professional costs and fees of defending a claim; balance sheet, cash flow and defence costs being the key areas protected by tax insurance.
Once a tax risk has been identified by tax teams, advisors or in a due diligence report and once a tax policy has been put in place, the identified tax liability, interest imposed by the tax authority/court, penalties imposed by the tax authority/court and the legal/tax advisor costs associated with defending any tax assessment may all be covered.
The tax insurance market is comprised of a mixture of company, Managing General Agents and syndicates of Lloyds of London. Insurer underwriting teams are generally staffed by tax lawyers and accountants who have been in the shoes of tax advisors and so are well placed to work with brokers and client-side tax advisors to develop solutions.
Over the past 20 years tax insurance has grown from a niche product with a handful of policies being placed in a year, to a mainstream part of M&A insurance, covering hundreds of risks each year.
Historically, the first entities to make use of tax insurance were large financial institutions and the investment-side of insurance companies in the context of complex financial transactions. However, as awareness has increased, Private Equity funds became the main users of the product in the context of their investments into portfolio companies. Growth over the past 10 years has been exponential, with Private Equity funds taking advantage of low pricing to eliminate tax uncertainty. More recently, large corporates have sought to make use of tax insurance to manage their tax risks, both in the context of M&A transactions and in non-M&A contexts.
| Buyers’s risks | Sellers’ risks | Everyday risks |
|---|---|---|
| Stamp duty or real estate transfer tax (RETT) exemptions | Application of tax treaties | Corporate reorganizations |
| Withholding tax (WHT) on the purchase price | Capital v income treatment of sales proceeds | Employer v contractor status |
| Transfer of a going concern (TOGC analysis) | Tax risks that a buyer seeks an indemnity for | Transfer pricing policies |
| Tax risks flagged in due diligence reports |
WTW’s Tax Team sits within the Transactional Risks practice and is made up of qualified tax lawyers and practitioners who, in their former careers, frequently conducted tax due diligence on target companies. This experience positions us well to guide clients through the tax insurance placement process and to add value at each stage, helping to ensure that the procured policy meets client needs and addresses the nuances of the exposure.
We take time to properly understand each client so that we can obtain the best insurance for them. Clients have plenty to consider when undertaking transactions or seeking to offset tax risk and so the WTW team seek to make the process as straight forward as possible, utilising our wealth of industry experience and leveraging trusted industry relationships to negotiate bespoke policies on your behalf.
