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Tax liability

How Tax Insurance can help address financial risks in mergers and acquisitions

What is tax insurance?

Tax insurance covers specific tax risks and provides financial protection should an associated liability arise. A tax insurance policy is a bespoke solution that provides peace of mind for the insured and the parties involved, and can be used in the context of a transaction (such as an acquisition, divestment or restructure) or with respect to a particular historical tax treatment.

A tax insurance policy will generally cover not only the identified tax exposure but also related penalties and interest. It can also provide cover for the gross-up of proceeds if they are expected to be taxed upon receipt. The relevant tax laws and statutes of limitations of the jurisdictions involved are taken into account when an insurance solution is designed to help maximise protection for the insured.

Benefits of tax insurance

The key benefit of tax insurance is that financial risk associated with a potential tax exposure can be effectively transferred to an insurer. The need for such protection is greater than it has ever been, given the spotlight being shone on businesses around the world and on their compliance with tax laws. Coupled with the complexity of tax legislation and the potential for differing interpretations of taxpayers and the relevant tax authority, being able to conduct business with increased certainty is critically important.

Benefits of tax insurance include:

  • Protection against the financial impact of identified tax risks arising in a transaction or restructure, or in respect of a historical tax position taken
  • Taking a potential tax exposure off the negotiating table when the parties are not able to agree on who should bear the risk in an acquisition or divestment scenario
  • Enabling a potentially ‘clean exit’ for sellers
  • Facilitation of confidential transactions and restructures when there are time constraints and seeking tax authority clearance is not feasible
  • Enabling transactions to proceed without identified tax risks resulting in purchase price adjustments or the need for cash to be put in escrow
  • Greater certainty when tax laws, precedent, and tax authority practice are unclear on a particular tax issue
  • Coverage when warranty and indemnity insurance excludes an identified tax risk.

Typical tax risks that can be insured

Tax insurance can cover a wide range of tax risks, including:

  • Taxation of gains on disposal
  • Withholding taxes
  • Rollover relief
  • Revenue/capital distinction
  • Transfer pricing
  • Availability of losses
  • R&D claims
  • Debt/equity treatment
  • Goods and services tax.

Is there a ready insurance market for tax insurance in Australia and NZ?

Absolutely. In fact, there is a very healthy and robust insurance market for tax risks in this region, offering comprehensive coverage, highly competitive pricing and more than enough capacity to cover even the largest of risks. We work closely with a number of insurers both locally and in foreign markets to ensure we marry up the specifications of a particular risk and the appetite of insurers and achieve the right outcomes for clients on a case-by-case basis.

Can tax insurance only be used in an M&A transaction?

No. While this is the most common scenario, tax insurance is equally available for business-as-usual tax risks that arise for corporate groups, such as historical tax positions adopted or risks associated with proposed reorganisations or debt restructures. If there’s a tax risk, no matter the context, tax insurance coverage can be sought.

Can tax insurance be used on a stand-alone basis or does it serve only as supplement to W&I cover?

Tax insurance provides different coverage to that of a W&I policy so it can be used whether or not W&I coverage is a feature of the transaction. The products are distinct in terms of what they cover, with W&I insurance proving protection against unknown risks and tax insurance aimed at addressing known, specific and quantifiable tax risks. That said, in the M&A context W&I and tax insurance will often both be sought, in which case these processes can be run side by side to optimise timing efficiencies and information gathering.

How do I know when tax insurance should be used?

The simplest way is to ask yourself a few key questions: (i) Has a material tax risk been identified? (ii) Does the tax risk cause a commercial and/or financial hurdle? (iii) Is the business comfortable retaining the risk and potential liability going forward having regard to the impact it could have on the balance sheet? If ‘yes’ is the answer to all or most of these questions, then it is worth exploring how tax insurance can help.

Who is the insured party under a tax policy?

Tax insurance is flexible in terms of who the insured entity is under the policy. Importantly, we will want to ensure that coverage is aligned with the entity that will bear the financial burden should the tax liability crystallise. This might be the target, the seller, the buyer, or the head company of a tax consolidated group, depending on the circumstances. Tax insurance can cover any of these entities so it’s critical that the terms of coverage under the policy are structured correctly.

How do you know when to make a claim under a tax policy?

The most common trigger for a claim starts with the commencement of an audit or review by the relevant taxation authority. If the investigation relates to the insured tax risk, the first thing to do is inform your broker and discuss your rights and obligations under the specific terms of the policy. It can then be decided whether a notification is required to be made to the insurer.

How can Marsh help?

We have market leading capability to:

  • Negotiate bespoke insurance policies tailored to the specific tax risk
  • Liaise with your professional advisers to ensure our advice and insurance solutions are consistent with desired deal dynamics
  • Access local and global insurance markets to ensure competitive pricing and maximum coverage
  • Advise on policy mechanics and interaction with any associated indemnity obligations
  • Provide ongoing support and assistance with claims

For more information, please reach out to Kane Sim.

Disclaimer:This information is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Any statements concerning actuarial, tax, accounting, or legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as actuarial, accounting, tax, or legal advice, for which you should consult your own professional advisors. Marsh makes no representation or warranty concerning the application of policy wordings and makes no assurances regarding the availability, cost, or terms of insurance coverage. LCPA No. 20/584

Marsh Pty Ltd (ABN 86 004 651 512, AFSL 238983) (“Marsh”) arrange this insurance and is not the insurer. The Discretionary Trust Arrangement is issued by the Trustee, JLT Group Services Pty Ltd (ABN 26 004 485 214, AFSL 417964) (“JGS”). JGS is part of the Marsh group of companies. Any advice in relation to the Discretionary Trust Arrangement is provided by JLT Risk Solutions Pty Ltd (ABN 69 009 098 864, AFSL 226827) which is a related entity of Marsh. The cover provided by the Discretionary Trust Arrangement is subject to the Trustee’s discretion and/or the relevant policy terms, conditions and exclusions. This website contains general information, does not take into account your individual objectives, financial situation or needs and may not suit your personal circumstances. For full details of the terms, conditions and limitations of the covers and before making any decision about whether to acquire a product, refer to the specific policy wordings and/or Product Disclosure Statements available from JLT Risk Solutions on request. Full information can be found in the JLT Risk Solutions Financial Services Guide.