Tax Liability Insurance (TLI) covers known tax risks. These risks can arise from an M&A transaction, a restructuring/reorganisation, a clearance alternative, as well as corporate or private client tax planning. The policies are flexible due to their bespoke nature and can also cover funds, specifically when a fund is to be wound up by ring fencing taxes still open to potential audit, allowing reserves to be distributed. Policies are designed individually to fit the tax risk being covered and are standalone rather than annually renewable, unlike other insurances. This means the policy is paid for in full at inception.

A TLI policy will cover the insured for:  

• A specific tax event being challenged by the tax authorities including the tax liability, tax geared penalties, interest, defence costs and gross up.  

• Advanced tax payments that may be required to be made to defend a position challenged by the authorities.  

The policy will not cover an organisation for losses arising from:   

• Fraud  

• Items already covered under a separate policy (typically W&I or RW policy)  

• Material inaccuracy or omissions from the policy by withholding information or misrepresenting details  

• Penalties uninsurable by law (such as criminal charges)  

• A change in law that materially impacts the covered tax position after the policy has been bound  

• Failure to comply with obligations in relation to dealings with the tax authority  

TLI is typically used as a solution to items flagged in a due diligence report, with a defendable position, covering areas across:

• Corporate taxes

• Employment status

• Income taxes

• Share incentive schemes

• Employment related securities

• Real Estate

• Point of sale

• Capital gains taxes

• Withholding tax

• Loss of tax reliefs

• Non transactional scenarios

TLI can also be used as an alternative to a clearance application, typically where income vs capital treatment may be in question.

• The premium is calculated based on the quantum of exposure to be covered. The quantum includes the tax at stake, tax geared penalties, tax geared interest, defence costs and gross up to cover taxes that may be incurred on receipt of insurance proceeds (to the extent required)  

• The insurers typically take the quantum and apply a percentage to it based on their own internal risk rating to determine the pricing of the policy  

• In addition to the premium, insurers will also charge an underwriting fee to cover their external advisor costs   

• Each insurer operates a minimum premium level, which can mean the standard percentage pricing model is not adhered to if pricing is around their minimum premium level. 

Typically tax policies cover a period of seven years which is in-line with most jurisdictions open enquiry window / statute of limitation period.    

It’s possible to have a tax insurance policy covering a ten year period in certain circumstances with some, but not all, insurers operating in the space.  

Many of the insurers have an area of focus, that may make them more suited for a specific type of tax risk. The territories the insurer can place tax policies in can also play a factor.  

Once these factors have been determined, we then consider the coverage offered, and if it is sufficient for the client; and whether there are insurers offering stronger terms than others.   

Finally, the pricing and previous experiences with insurers are also factored in when selecting an insurer.  

Coverage is available for most territories, provided that there is a stable political climate with a developed legal system.