Tax insurance policies are used to give protection against financial losses suffered in the event that the insured tax treatment is challenged by the taxing authorities.
Tax insurance policies can be employed to transfer tax risk relating to a particular
merger & acquisition (M&A) transaction. For example, the policy can be taken out by the seller to back an indemnity or by the buyer if the seller is unwilling to stand behind the liability.
Tax insurance can also be obtained independently of M&A or other transactions and may be used to reduce or eliminate exposure associated with historic tax positions. It is also frequently used in the context of corporate restructurings.
WHAT WE DO
We can arrange insurance for the following tax treatments:
De-grouping relief following restructurings
Applicability of transfer taxes
Substantial shareholder exemption/participation exemption
Permanent establishment and residency issues, trading risk
Tax treaty issues
Withholding tax on interest/royalties/dividends
Other matters which are regarded as low or low/medium risk.
When determining cost and insurability insurers will consider:
The strength of the expert opinion/ tax advisor’s due diligence on the point
The likelihood that the treatment will be challenged and the chances of a successful defence thereafter
The quantum of the liability
How aggressive the tax position taken is
The motivation for looking at insurance.
Premium rates generally range from 2% to 8% + premium taxes and fees.
How long does it take to buy W&I insurance?
The process can be completed within one week. There are two stages to the process:
Our M&A team will seek non-binding terms from insurers. This will take 2-3 working days. In order to do this we will require:
The most recent draft of the sale and purchase agreement (SPA)
Background information on the target and an overview of the transaction
The accounts of the target (if available)
An insurer will be engaged to undertake full underwriting. Some insurers may charge a fee at this stage. However, this will often be waived in the event the insurance is purchased. This will take approximately 5 working days. The insurer will require:
Access to the data room
Up to date versions of the SPA and disclosure letter
Access to the Buyer’s due diligence (if it is a buyer’s policy)
A short underwriting call with the deal team
During this stage the Insurer will issue a bespoke policy which will be negotiated.
What are the key inclusions and exclusions?
The measure of damages in the policy will usually match the sale and purchase agreement (SPA) and the duration of cover will mirror the agreed limitation periods (unless the policy is used by a buyer to extend the period of protection).
Insurance does not replace the need for a thorough deal process. Insurers expect robust negotiation of warranties, good disclosure and sensible due diligence (DD).
W&I insurance will usually exclude matters that are known to the insured, including matters disclosed by the seller or within DD reports. Forward looking statements (including projections, forecasts and collectability of debts), certain fines and penalties, pension underfunding and post completion purchase price adjustments. In some circumstances insurers may exclude certain warranties and/or apply other policy exclusions (e.g. transfer pricing). This will depend on the insurer and the underlying transaction.
Our M&A team combines experienced insurance professionals and corporate and tax lawyers with former W&I underwriting experience to provide unparalleled market experience
JLT gives you a tenacious and highly experienced global team that are used to working at the speed of the deal 24/7
Our coverage experts continue to rigorously test our products and exclusive JLT wordings. We consider both the coverage and claims perspective and our claims team play an active role prior to binding policy wordings to ensure that you get the broadest protection available
We involve our dedicated claims management experts at the outset for their insights when designing insurance programmes. We use their expertise to avoid any ambiguities in the wording and we work with markets that are claims responsive
We will speak to you in a language you will understand and we will explain any complexities so that you know exactly what service you are getting and what you are covered for. We can explain the particulars of your cover in a clear and concise way for your peace of mind.
Key inclusions and conditions
The policy will typically cover the following for a period of up to 10 years:
The tax liability
Gross-ups where applicable.
The policy is designed to cover interpretation risks rather than implementation risks.
It is therefore not the intention of the policy to insure structures that fail because the parties incorrectly implement the steps necessary to achieve the desired treatment. Similarly insurers have little appetite for tax risks predominantly relating to valuation or discovery.
Exclusions can be risk specific but standard exclusions include (1) any material inaccuracy, omission, misleading statement or misrepresentation in the representations or documents, (2) loss which arises following the insured’s non-compliance with the policy’s claims provisions or other obligations of the insured, (3) change in law and (4) fraud.
How to get cover
To enable our M&A team to approach insurers and provide a better sense of price and coverage, we would need:
A brief overview of the tax matter under discussion
A copy of any opinions provided
A calculation of the likely tax liability and associated costs (defence costs, applicable interest and late payment penalties, for example)
A brief summary of the underlying transaction (if this matter has come out of an M&A scenario).
Insurers typically take three to four days to provide their non-binding indications. Once an insurer is selected the next stage is to proceed to legal review. Insurers will appoint their own legal counsel to give an independent overview of the documents you have supplied.
The cost of this review will be determined by the complexity of the tax treatment, the jurisdiction and the insurers’ own previous experience of the specifics.
On average, the external fees range from £10k-£20k. Some insurers deduct this cost from the insurance premium, others charge it in addition. Upon completion of their review, insurers will offer their confirmed terms. The overall length of this process is dependent upon the specifics but will usually take two to three weeks.