Report

Pillar Two tax risk insurance – Irish market considerations

1. Introduction

Uncertainty surrounding the Pillar Two regulations and their implementation continues to spur discussion. As such, Marsh carried out a survey of European transactional risk and tax insurers to determine the extent to which Pillar Two tax exposures can be underwritten. The survey provided insight into the direction of Pillar Two risk management prospects in Ireland and organisations and investors may wish to consider the results of the survey in adapting their tax risk management strategies.

In order to develop an understanding of the extent to which tax insurers are willing to insure Pillar Two risks, specialist insurers that underwrite mid-market tax exposures (€100 million to €1 billion) were consulted. Questions focused on whether there is appetite for (and experience of) insuring Pillar Two risks. In addition, participants were asked to address conditions for insurability and to confirm indicative pricing.

2. Pillar Two

Pillar Two aims to create a fairer and more stable international tax system by protecting the tax base and curbing tax avoidance by multinational corporations. The publication of the Global Anti-Base Erosion Model Rules (Pillar Two) by the OECD in December 2021, outlined a global minimum taxation for international companies. It was implemented in Ireland in 2023 by way of Section 94 of the Finance (No.2) Act 2023’s insertion of (a new) Part 4A of the Taxes Consolidation Act (TCA) 1997.

The regulatory framework of Pillar Two stipulates that in certain cases, a top-up tax must be levied on large multinational companies. To determine this tax, the tax base ‘GloBE Income’ is set in relation to the predefined recorded taxes ‘Adjusted Covered Taxes’. This allows for the identification of the states in which a multinational group of companies (MNE Group) is subject to an effective tax rate of less than 15%. When a group of companies has an effective tax rate of less than 15% in a certain country, a top-up tax is generally levied at the level of the ultimate group company within the framework of the ‘Income Inclusion Rule’ (IIR) and ‘Qualified Domestic Top Up Tax’ (QDTT). In the event that the low taxation is not (or is not fully) compensated for by the IIR, the ‘Undertaxed Profits Rule’ (UTPR) applies, the aim being to raise the effective tax rate of multinational groups to a minimum of 15%. However, the top-up tax is only calculated after deduction of a substance-related discount, so that ultimately only the ‘excess’ profit is subject to taxation.

In the Irish context, Pillar Two's target group and addressees are constituent entities located in Ireland that are part of an MNE Group. The prerequisite for designation as an MNE Group is that it achieves a turnover threshold of at least €750 million in the consolidated financial statements of the ‘Ultimate Parent Entity’ in at least two of the four previous financial years.

Though simple in theory, in practice, there is considerable scope for uncertainty as by implementing these rules into Irish tax law, new laws have been introduced (which require interpretation), and ordinary accounting is interrupted by the increased administrative burden of the minimum tax assessment. The starting point for the calculation of GloBE Income is the result of the included group entity according to the annual financial statements (before consolidations of intra-group transactions). The result of the included company is generally to be calculated in accordance with the accounting standard used in the preparation of the consolidated financial statements of the group parent company. In addition, there are various adjustments and voting rights which must be carefully exercised. For example, uncapitalized tax deferrals on loss carryforwards can lead to an effective tax rate of less than 15% in the year of loss offsetting. This would trigger the application of Pillar Two provisions, and so the delta between the actual tax rate and the 15% minimum rate would be subject to tax.

Some uncertainties can be preempted or clarified in Irish tax law by way of Revenue Opinions or Confirmations in accordance with Tax and Duty Manuals Part 37-00-40. However, the parameters for seeking a Revenue Opinion are relatively narrow. The question therefore arises as to whether Pillar Two risks can be insured.

Pillar Two coverage: W&I insurance or tax insurance

Two types of policies can be used to insure tax risks:

Warranty and indemnity (W&I) insurance, which is used to insure unknown tax risks that emanate from events in the past. Placed in the context of a corporate transaction, the provisions of W&I insurance are linked to the warranties and indemnities provided by a seller to a buyer in a sale and purchase agreement. A significant part of the cover is protection in the event that a seller has not disclosed relevant information to a buyer, or for risks which have not been discovered in due diligence.
Tax insurance is a form of standalone insurance that covers both known and unknown tax risks that have arisen in the past or may arise in the future. It has a much broader scope of application than W&I insurance and so can cover tax risks outside of an M&A transaction, e.g. those risks for which a resolution might otherwise be sought by seeking a Revenue Opinion or Confirmation.

Insurer appetite — W&I Insurance

Approximately a third of insurers are willing to provide insurance cover for tax risks related to Pillar Two under a W&I insurance policy. Another third have clear reservations about providing coverage under W&I insurance, while the final third have yet to take a position. A list of reasons for the reluctance to offer tax cover under a W&I insurance policy includes:

Pillar Two being typically outside of the scope of tax due diligence
Lack of experience or lack of market consensus
The accounting standard may lead to risk allocation uncertainty (in the context of de-/first-time consolidation)
Liability for a third-party tax is difficult to assess without considering the position of both sides of a transaction
Certain issues are outside of the control of the parties (such as which countries have implemented the rules)
Uncertainty regarding political decision-making on Pillar Two implementation

Insurer appetite — Tax insurance

The picture as relates to standalone tax insurance is clearer, and here there is a general willingness among insurers active in the Irish market to provide cover for Pillar Two risks. Insurers will consider areas such as:

Risks around inconsistency in implementation and interpretation in national law or tax authority commentary.
The Group's use of Safe Harbor Rules.¹
Risks related to the question of whether the non-consolidation of MNE Groups/units of companies is correct (this is likely to be particularly relevant at the time of first filing Pillar Two returns).

The majority of insurers surveyed will consider covering known Pillar Two risks under a tax insurance policy.

3. Conditions for coverage

Insurers will require a comprehensive analysis in order to be able to adequately assess the risk profile of a Pillar Two exposure and so a general statement about the non-applicability of Pillar Two will not be sufficient. Insurers will expect to be provided with all relevant information, including technical analysis and, where appropriate, detailed opinions from tax advisors, tax counsel, or auditors. In addition, it is important where possible to understand the position of the tax authorities in relation to the risk and since Pillar Two sits at the interface of tax and commercial law, where relevant to the tax position, a wider legal analysis may also be desirable.

4. The tax insurance process

Your Marsh transactional risk broker should be your first port-of-call as they will assist in presenting the risk to a selection of competent insurers. This marketing exercise forms the basis for insurers' initial opinion about a tax risk. Your tax and legal advisors will be asked to present the technical aspects of the risk as relates to Pillar Two and it implementation, application, and interpretation in Irish Law, thereby giving the insurer a comprehensive analysis of the risk.

5. Limitations and challenges

As a function of the complexity of Pillar Two, its multi-jurisdictional nature, the ongoing political background to the legislation, and the fact that it is still in its early stages, insurers do face complexity in underwriting these risks. In addition, it may be important to specifically consider the potential effect of the US Government‘s position on Pillar Two application and its threat to impose punitive tax consequences where Pillar Two is applied to US companies.

Irish Pillar Two risks are insurable and the insurance market is optimistic that with time and growing levels of knowledge and experience appetite will only broaden.

6. Pricing

When providing additional cover for unknown Pillar Two risks under W&I insurance, insurers will usually charge an additional premium structured as a one-off payment. The amount of the additional premium would be risk dependent but might range anywhere from 10% to 40% of the base premium.

The pricing or premium for the coverage of Pillar Two risks under tax insurance will also vary depending on the specifics. While the usual rate range for tax risks in Ireland is between 1% and 3%, the actual rate may differ depending on the risk profile and is influenced by both market-related and risk-related factors. Some insurers expect premiums for Pillar Two risks to be higher than the ordinary tax insurance range, at least in the initial phase, with some setting rate expectations at 4% of the chosen policy limit.

7. Key takeaways

Irish Pillar Two risks are insurable and there is growing insurer interest in providing solutions for Irish Pillar Two risks.
Cover for known Pillar Two risks from the past and those that may arise in the future can be insured with tax insurance
W&I insurers express a moderate willingness to cover unknown Pillar Two risks however the consensus is that a new standard Pillar Two exclusion may begin to be included under W&I insurance policies.

Risk management professionals and deal teams in Ireland would be well advised to incorporate these findings into their approach to managing Pillar Two risks in liaison with their Marsh insurance broker.

For more information, please visit our dedicated Private Equity, Mergers & Acquisitions page or contact us here.

^[1]The Country by Country Reporting Safe-Habour rule is a temporary exemption provision according to which the tax increase amount is set at zero upon request if one of three test criteria (de minimis exception, simplified calculation of the effective tax rate or the substance test) is met. For this purpose, the data already available from the country-by-country reports can be used.

Article

Pillar Two tax risk insurance – Irish market considerations

1. Introduction

2. Pillar Two

Pillar Two coverage: W&I insurance or tax insurance

Insurer appetite — W&I Insurance

Insurer appetite — Tax insurance

3. Conditions for coverage

4. The tax insurance process

5. Limitations and challenges

6. Pricing

7. Key takeaways

Our people

John Small

Related insights

Rethinking Resilience with the Retail & Consumer sector

UK Government ransomware legislative proposals: Key outcomes of the consultation

Five trends in UK cyber insurance in the first quarter of 2025

Debunking Generative AI myth #3: GenAI insurance issues

Marsh.com Sign in

Pillar Two tax risk insurance – Irish market considerations

1. Introduction

2. Pillar Two

Pillar Two coverage: W&I insurance or tax insurance

Insurer appetite — W&I Insurance

Insurer appetite — Tax insurance

3. Conditions for coverage

4. The tax insurance process

5. Limitations and challenges

6. Pricing

7. Key takeaways

Global transactional risk insurance claims report 2025

Our people

John Small

Related insights

Rethinking Resilience with the Retail & Consumer sector

UK Government ransomware legislative proposals: Key outcomes of the consultation

Five trends in UK cyber insurance in the first quarter of 2025

Debunking Generative AI myth #3: GenAI insurance issues