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Manage your Tax Risks and Unlock Cash in M&A Transactions

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How You Can Mitigate Tax Risks and Unlock Cash in M&A Transactions

Across Asia, tax laws are getting increasingly complex and open to interpretation. Hence, there is heightened uncertainty as to whether a particular tax position may be challenged by the authorities. While taxpayers may prefer to adopt certain positions and interpretations to their advantage (especially when the tax laws are not clear), the additional tax exposure (including penalties and interest) may be significant.

To manage this, tax insurance can be used to transfer relevant risks to insurers and obviate the need for any remedial actions, providing valuable certainty to the taxpayer.

Tax insurance can cover specific tax positions a taxpayer has taken historically, as part of the company’s ongoing operations, or to cover tax risks associated with a group restructuring.

Tax insurance can also be employed to transfer tax risk arising from or identified in the course of Merger and Acquisitions (M&A) transactions. Such policies are used by sellers to back an indemnity or taken up by buyers when their sellers are unwilling to stand behind the potential liability on specific tax issues. This is an alternative to requiring an escrow mechanism or purchase price adjustments. In addition, tax insurance may avoid the need to obtain any advance ruling from the tax authorities, which may not be feasible due to time constraints in M&A transactions.

Download the brochure to find out more about tax insurance.

Premium Rates Worldwide 2021 / 2022

Tax liability premium rates differ across geographies, and having a view of the rates around the world will help you better structure and price tax liability insurance into your transactions.

Our summary of the premium rates below provides a high level breakdown of premium rates for different locations. We have also highlighted the key considerations when structuring your tax liability insurance policy.

 

 

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Notes

1)    The premium rates provided for the various territories are based on the assumption that the risk is not under query / audit by the tax authorities.

Furthermore, pricing will vary based on a variety of factors, including:

  • Limit of insurance required.
  • Governing law.
  • Strength of the opinion provided by tax advisors.
  • Fact pattern and nature of the tax risks.

Insurers will often have minimum premium levels, thus for some smaller limits of insurance, the premium rates may be higher than the rates indicated. Conversely, if large limits of insurance are required, often a program of insurance is built using the combined capacity of various insurers, which mean the overall rate may be lower than the rates indicated.

In the table above, the rates provided do not include any insurance premium tax or other applicable regulatory taxes.

2)    Premium = Limit of Liability x Premium Rates (%)

3)    Limit of Liability is generally the sum of the following:

a) Tax liability, inclusive of interest and penalties.

b) Defense costs.

c) Tax liability on the insurance proceeds, if any (i.e. tax gross-up).

Tax liability insurance is used to provide coverage for a variety of risks. Some examples of tax risks that we have worked on include:

  • Characterization of trading gains versus capital gains. 
  • Availability of losses and capital allowances carried forward.
  • Availability of treaty benefits.
  • Interpretation of indirect transfer rules.
  • General anti-avoidance rules.
  • Transfer pricing. 
  • Debt vs equity characterization.
  • Permanent establishment risks.
  • VAT / GST risks.
  • Withholding taxes.
  • Capital gains tax rollover relief.
  • REIT status and related risks.
  • Tax-free reorganization. 

The insurance regulatory environment and the restraints imposed upon insurers and brokers may apply in some jurisdictions.

Areas to consider include:

a) Is a particular insurer admitted to underwrite this class of insurance in a particular territory?

b) Does a policy have to be filed with the insurance regulator? 

c) What insurance premium tax is applicable? Are there any other applicable taxes?

d) Is the broker you are using licensed to provide advice in a particular country? Some territories to consider include Switzerland, South Africa, Japan, and the Middle East.

Being one of the leading global brokering teams in the transactional risk insurance market, Marsh is experienced in placing tax liability insurances globally and will be able to advise and guide you on the regulatory aspects in getting a policy in place.

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