Tax liability insurance: Protection from uncertain tax costs

What is tax liability insurance?

Tax liability insurance is designed to transfer a known, but uncertain tax risk arising in your transaction, fund or business to an insurers’ balance sheet. The insurance indemnifies the policyholder for financial loss arising from a successful challenge from a tax authority, removing uncertainty around potential tax liabilities.

Tax liability insurance will (subject to policy limits) generally provide a policyholder coverage on:

• The tax liability arising from the insured tax risk;
• Interest and penalties;
• Defence costs; and
• Tax gross-up

Who should buy tax liability insurance?

Tax liability insurance should be a key consideration for decision makers to manage tax risks arising during any part of the business, investment or fund life cycle, including prior to and in conjunction with implementing any M&A transaction, investment or fund structure or business restructure.

Benefits of tax liability insurance

A tax liability insurance policy can facilitate a transaction by:

• Providing certainty and managing financial loss by transforming a potential tax liability into a quantified insurance cost, allowing the issue to be accounted for precisely
• Enhancing or preserving the value of a business or a particular asset
• Enabling a solution when parties do not want (or do not have time) to obtain prior clearance from tax authorities

Examples where tax liability insurance can help manage tax risks and uncertainty, include:

• Revenue/capital characterisation of gains and losses
• Debt/equity classification
• Availability of tax losses
• CGT rollover relief
• Tax consolidation (including exit gains, tax cost setting considerations)
• Secondary tax liabilities
• Source of income
• Tax offsets (R&D, foreign income tax offsets)
• Withholding tax and treaty relief
• Tax residency
• Taxation of financial arrangements
• Part IVA
• Transfer pricing
• Indirect taxes (stamp duty, employment taxes, GST, land tax)