Tax liability insurance enables a taxpayer to either reduce or eliminate financial loss arising from the tax treatment of a particular transaction, investment or other corporate activity in circumstances where the legal conclusions underlying the tax treatment may be subject to challenge by the relevant tax authority.
The tax policy is crafted to cover the specific financial exposure of the insured in the event of an unfavourable determination by a tax authority, including:
- the primary amount of tax payable
- interest and insurable fines and penalties
- defence costs, including the expenses involved in engaging legal or tax advisors
- gross-up in the event insurance proceeds are subject to tax
Why use it?
Tax liability insurance can be a cost-effective risk transfer tool to protect an insured in circumstances where there is an element of uncertainty about the tax consequences arising from:
- a change in ownership of a company
- the historic tax positions taken by a target company or its consolidated tax group
- a re-organisation
The tax policy can assist where parties are unable to obtain timely clearances from tax authorities prior to the sale of a target company and remove the need for an indemnity, an escrow and/or price adjustment to close the transaction.
Process
1
Phase 1
· Provide high-level information on the risk for an initial view from RCA on the insurability and likely pricing range.
· Depending on the complexity and commercial sensitivity RCA may have no-names discussions with select tax insurers to obtain initial market feedback.
· Minimum information required is a high-level description of the transaction or tax planning and the broad tax advice/analysis from the insured’s tax advisor.
2
Phase 2
· Depending RCA’s review of the documents and on the complexity and whether or not the tax risk is something tax insurers are sufficiently comfortable with, tax insurers may provide an NBI based on high-level information on the basis that a favourable opinion and supporting documents will be provided.
· For a more unique tax risk, and ideally for every tax risk, the insured provides a favourable opinion or memo from its tax advisor and supporting documentation which RCA reviews ahead of approaching prospective tax insurers.
· Tax insurers issue an NBI based on the information provided.
3
Phase 3
· RCA liaises with tax insurers on proposed cover and reports to the insured and with a recommendation.
· The tax insurer is selected.
· Depending on how advanced and complex the risk is (for example a historic risk rather than a structure that has not yet been entered into), a phased approach to the underwriting may be required, with the insured committing to cover the tax insurer’s fees for an initial stage review, followed by a final phase.
· All relevant documents and analysis are provided to the tax insurer for review by them, and potentially their external advisers.
4
Phase 4
· RCA works with the tax insurer, the insured and the insured’s adviser to draft and agree the tax policy, bespoke to the insured’s tax risk.
· Final documents any final opinions or other advice are presented to the tax insurer and the tax policy finalised.
Make a claim
We would be pleased to assist with any claim enquiry. Please complete the form and one of the RCA team will respond as soon as possible.