What is tax liability insurance?
Tax liability insurance is designed to transfer a known, but uncertain, tax liability from a company’s balance sheet to an insurance company. The insurance indemnifies the policyholder for financial loss arising from a successful challenge from a tax authority, removing uncertainty around potential tax liabilities.
For M&A transactions, policies are available either pre- or post-transaction. Tax liability insurance is also available on a stand-alone basis, for example, as part of an intra-group or pre-initial public offering (IPO) reorganization.
Specific tax coverage can include:
- Defense or contest costs
- Additional tax deemed due to tax authorities
- Interest, fines and penalties (to the extent insurable)
Coverage is available across a wide range of jurisdictions and industry sectors. When considering requests for tax liability coverage, insurers will look at residual risks relating to known tax issues as well as the tax structure of the acquisition itself.
Who should buy tax liability insurance?
Tax liability insurance is normally bought in the context of investments or M&A transactions where there are questions over the validity of a tax position, usually uncovered during the due diligence process.
Benefits of tax liability insurance
A tax liability insurance policy can facilitate a transaction by:
- Providing certainty and managing negative financial impacts by transforming 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 be provided include:
- Availability of substantial shareholding exemption(s) in relation to a disposal of shares
- Categorization of asset sale versus business sale
- Residency issues
- Debt for equity swaps
- Secondary tax liabilities (including VAT groups)
- Stamp duty land tax group relief
- Tax charges arising on the disposal of loan notes
- Tax-exempt demergers
- Withholding tax on overseas dividend payments
- Trading versus investment risk
- Tax residency
- Transfer pricing
Tax laws and regulations can be complex. And seeking official guidance, even if it’s an available option, is costly and time-consuming. In today’s fast-moving world, businesses, fiduciaries and individuals may require greater tax certainty to move transactions and business strategies forward than what our complicated tax rules and guidance process can provide. At Willis , a WTW business, we recognize that taking bold business steps shouldn’t create tax risks that can create financial drag. Our tailored tax insurance solutions offer peace of mind and financial security to bridge the gray areas of tax law. Discover how our comprehensive tax insurance services can protect you and your business.
What is tax insurance?
Tax insurance provides specialized coverage designed to protect individuals and businesses against known tax risks. This solution serves as a financial safety net in situations where you take a tax position based on your best interpretation of the tax law, which may be challenged by tax authorities, potentially necessitating financial reserve or creating financial liability. The primary purpose of tax insurance is to mitigate risks associated with tax uncertainties, so policyholders can navigate complex tax landscapes with confidence.
Several scenarios highlight the benefits of tax insurance:
- Energy tax credits involve complex rules and regulations related to structure, qualification and recapture. Tax insurance offers investors, energy project developers and buyers of tax credits the ability to protect the value of the tax credits claimed.
- Mergers, acquisitions and restructurings involve multifaceted tax implications that can be difficult to predict. In such cases, tax insurance can eliminate the need for parties to maintain financial escrow, safeguarding against unexpected tax liabilities that may arise post-transaction and the hassle of haggling over the escrow long after the transaction has closed.
- Sophisticated tax planning by businesses relating to issues as wide-ranging as residency and domicile, sale of business proceeds and earnouts, internal reorganizations involving the movement of assets or wind up of liabilities and tax planning around executive compensation that can potentially lower current reserves for financial disclosures but may be subject to audit and losses years later. Tax insurance can lower the materiality threshold for current disclosure by providing downside protection for future liabilities.
- Businesses engaged in international trade may face challenges related to cross-border tax compliance, tax treaty interpretation and transfer pricing. Tax insurance offers protection against potential tax audits and disputes in these situations.
- Startups and businesses with unique tax structures also find value in tax insurance, as it provides an extra layer of security against unforeseen tax assessments.
- Individuals engaged in sophisticated estate planning and fiduciaries seeking to de-risk tax positions can utilize tax insurance to protect against unexpected tax liabilities, securing peace of mind while fulfilling any heightened fiduciary obligations.
The tax insurance process starts with an assessment of the legal soundness of a tax position, typically by a third-party advisor who will review relevant laws and risks related to specific transactions. Insurers then evaluate these risks to set the premium. If, even after you have defended your insured tax position, the tax authority nonetheless prevails, the policy covers legal fees, taxes, interest, penalties and gross-up, subject to the policy limits.
At Willis, we specialize in providing tailored tax insurance solutions that meet the unique needs of our clients. Our experienced team of former lawyers and CPAs understands the complexities of tax law and the potential challenges businesses and individuals face, allowing us to provide solutions that offer comprehensive protection. Our expertise and commitment to client success make Willis a leader in the tax insurance market, offering innovative solutions that help businesses and individuals thrive.
What are the benefits of tax insurance?
There are several benefits of having tax insurance:
Our tax insurance solutions are tailored to meet the unique needs of your business. Willis’ team of experts work closely with you to understand your specific circumstances and provide customized coverage that aligns with your operational requirements.
Why choose WTW’s tax insurance solutions?
Willis offers global tax expertise spanning not only in North America but throughout Europe, Asia, Middle East and South America. Our insurance relationships extend from AAA rated domestic carriers to A- or better carriers throughout the world. With our depth of expertise and breadth of insurance relationships, we are able to provide specialized expert guidance in navigating tax law and regulations while offering you the broadest insurance solutions.
Our team brings a 360-degree perspective to the tax administration process, with a combined 50+ years of experience between law firms, the IRS, in-house head of tax, Big 4 accounting firms and M&A expertise, we examine your tax risks from every angle.
