Beyond M&A: The evolution of tax liability insurance
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Beyond M&A: The evolution of tax liability insurance

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BMS Group
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Dean Andrews of BMS Group explains how the concept of tax liability insurance is evolving in a post-BEPS world to assist corporates ring-fence substance and transfer pricing risks on an on-going basis.

The rise of tax liability insurance

The use of tax liability insurance (TLI) has grown substantially over the last five years across the globe. This growth has been in conjunction with, and largely because of, the growth in the use of warranty and indemnity insurance (W&I) by the private equity community on portfolio acquisitions.

The majority of TLI policies emanate from acquisitions of businesses and real estate (in this context, real estate includes infrastructure and renewables assets) where a potential liability relating to the tax affairs of the target or the structuring of the transaction is identified by the buyer’s due diligence, or where there is a potential risk already identified by the seller. On the basis that such a risk is identified before closing, it would generally be excluded from cover afforded by a W&I policy, as these are intended to insure against ‘unknown risks’ covered by the warranties and tax indemnity in the acquisition agreement.

The number of W&I policies written by the global mergers and acquisitions (M&A) insurance market has increased approximately 20% year on year for the last decade. Based on information from insurers, there were over 6000 policies placed in 2019 globally. There were more than 500 tax enquiries sent to the tax insurance market in 2019, and despite the impact of COVID-19, June 2020 was one of the busiest months in terms of tax enquiries.

Such a significant increase in the use of tax insurance policies has resulted in an equally significant increase in dedicated tax expertise to the insurance market to service such demand. At the time of writing, there are more than 20 teams in Europe alone able to provide TLI policies, up from approximately five in 2015. The impact of such rapid growth has led to increased competition between insurers with new teams continuing to join the market. This means not only lower premiums, but also a broadening of the insurer’s appetite as to the category of risk and the jurisdiction in which it arises that they will consider.

What risks are typically insured?

Although TLI, along with M&A insurance more generally, is sector agnostic – a significant proportion of the risks seen in the European market are related to real estate transactions. The rationale for this is that similar types of risks based on similar fact patterns tend to arise frequently on real estate transactions, and as Richard Taylor-Whiteway of Brockwell Capital notes, “real estate investment structures are essentially a series of cashflows and are heavily model-driven, which means that any tax leakage will have an adverse impact investment returns”.

Real estate TLI examples in the UK include:

  • Tax residence of offshore property companies;

  • Application of transactions in land rules; and

  • VAT related to the sale of a property as the ‘transfer as a going concern’.

This is not unique to the UK. Each country across Europe has its own examples that arise frequently, such as the civil law activity tax (CLAT) in Poland, 3% tax in France or the real estate transfer tax (RETT) in Germany, which all have been frequently insured. In the US, insuring the availability of tax credits across various sectors and affirmation of real estate investment trust status is also common. Insured risks emanating from real estate transactions have accounted for as much of 50% of the policies placed in recent years, which has since dropped to approximately 30%. This is on the basis that as the number of tax insurers has grown, they have had to expand their appetite to include a broader range of risks and dynamics due to competition for the more frequently insured.

Impact of COVID-19

Despite the continued use of TLI policies in M&A, there is a general acceptance that the proportion of non-M&A related policies is going to increase significantly over the coming years. The pace of this evolution will undoubtedly increase due to the market shock caused by COVID-19.

There has been a recent shift in focus by the M&A insurance market to servicing ‘distressed’ arrangements, for example, where businesses look to conduct reorganisations to simplify group structures, rationalise underperforming assets, or make changes that are required as part of a re-financing, and subsequently tax risks in some form may arise.

Insuring tax risks emanating from restructurings is not new to the M&A insurance market, but nonetheless the number of policies arising as a result is likely to increase in the short to medium term. Increases in the level of scrutiny of tax authorities and a bigger focus on tax compliance also has a direct impact on the number of policies being placed.

Andrzej Pośniak, managing partner and head of tax at CMS in Poland, notes that “currently, Polish tax regulations list a considerable number of issues that cannot be covered by tax rulings. As a result, many businesses are turning to TLI to address risks that cannot be addressed by engaging with the tax authorities”. 

Equally, the stress that COVID-19 restrictions are placing on the cash flows of many businesses has caused those with monies locked up in escrow or deferred payment arrangements related to tax to turn to TLI as a means to unlock trapped cash.

“It is common for many reasons, be it an M&A transaction, financing arrangements, real estate development or otherwise, for amounts of money flowing between businesses to be deferred or held in escrow pending the resolution of a tax issue. Lately, there has been significant demand from clients to obtain the early release of such trapped cash, and TLI has proved an excellent solution for replacing the downside protection of an escrow or deferred payment arrangement. It allows cash to be released while maintaining financial protection for the tax issue” commented Ben Jones, partner and head of London tax at global law firm Eversheds Sutherland.

Moreover, as tax authorities deal with the administrative burden of government responses to COVID-19, the time required to obtain a ruling or clearance has increased and taxpayers are increasingly using TLI as an alternative. “Requests for cover during recent months,” notes Taylor-Whiteway, “have frequently related to where tax insurance is being used instead of approaching a tax authority. We can respond in a matter of days and have a policy in place within a week. The speed of insurance can be key to getting a deal done.”

Staffan Bos of Transact Risk Partners notes that “even jurisdictions like the Netherlands, with an approachable tax authority and relatively quick turn-around times for tax rulings, have been impacted by COVID-19, increasing the need for TLI as a reliable and quick alternative”.

Where next?

Ultimately a tax broker’s role is to ensure that their clients have access to the most comprehensive tax insurance solutions available at the most competitive prices. In addition to this, BMS work closely with the tax insurance market to find new and innovative ways to provide solutions for our clients.

There is an appetite within the insurance market to provide TLI policies that are more akin to traditional insurance policies, i.e. an annual renewal providing ongoing cover for certain risks. The underlying premise for TLI will remain the same, being that a policy is placed based on the technical analysis of a risk, providing cover for a challenge by the relevant tax authority of the tax filing position at or before the date the policy was placed.

This approach is suitable for the majority of identified risks as the policy typically covers a specific event or set of circumstances that have given rise to a theoretical risk. However, there are certain areas of tax that provide an ongoing risk of challenge by tax authorities and it is those to which the ‘renewal’ concept most effectively applies, namely transfer pricing (TP) and substance issues.

With both TP and substance requirements, a corporate group is required to apply the relevant rules to the operational reality of the business, and provide evidence of this application using legal documentation in order to defend their interpretation if challenged. TP has the added complication that ‘regular’ – the insurance market acknowledges that the meaning of ‘regular’ varies depending on the nature of the business – benchmarking exercises should be carried out to evidence that the pricing allocated for the relevant intra-group finance, service or royalty payment remains a fair reflection of the ‘market’ pricing, as if the payment were made on an ‘arm’s-length’ basis.

An example of this is Uber which, as previously reported by ITR, is conducting a wholesale review of its TP policy due to a COVID-19 driven restructuring which took place earlier this year. TLI is not limited to ‘classical’ TP issues. Certain jurisdictions have introduced additional limitations on the tax deductibility of intra-group purchases.

“Polish tax regulations limit the tax deductibility of e.g. advisory and marketing services purchased from related parties, provided that they are not incurred directly in the production and sale of goods and rendering of services”, notes Pośniak. “The issue of when such costs are incurred in the above-mentioned circumstances is perfectly situated for coverage under a TLI policy”. 

In relation to substance, although ongoing benchmarking analysis is not required, what may be considered to be relatively minor changes to a business’ operations may mean it unintentionally falls below the minimum substance requirements for tax residency status, or equally unintentionally creates a permanent establishment in a given jurisdiction, both of which could have catastrophic tax consequences.

As Jones notes “substance is one of the most important issues for multinational businesses at this time. It is an area of significant and increasing uncertainty, but also an area where businesses are applying real focus and endeavouring to ensure their arrangements have genuine commercial substance aligned with their operations in the relevant jurisdictions. However, as the question of substance is usually determined by the tax authorities of counter-party jurisdictions (of which there can be many), and there can be significant differences in approach and focus, TLI has the potential to provide multinational businesses with vital backstop protection in this area.”

Substance issues are closely connected with the verification of the beneficial owner status. When tax regulations require taxpayers to verify the beneficial owner status of a counterparty for international tax purposes, TLI is likely to play an increasing role in managing the risk of an unfavourable interpretation of the beneficial owner status by the tax authorities. 

The process for extending TP cover

In order to extend the period of cover for an additional year on a rolling basis, an insurer will typically require ‘top-up’ diligence to be conducted. This means that the businesses’ tax advisors should conduct a high-level review to confirm that the facts and circumstances remain as such that no TP adjustment should be required, or that no material substance risk has arisen. Additional premium will also be due which will be a fraction of the amount originally paid on the basis the ‘top-up’ policy covers tax authority challenges in the previous 12 months, thereby providing back to back cover with the primary policy.

In relation to TP, an updated benchmarking exercise may also be periodically required in line with what is considered prudent for the relevant business. Insuring TP adjustments to finance costs incurs lower premiums and involves a less onerous underwriting process than service charges or royalty payments due to the wealth of comparable data available for insurers to rely on.

“Transfer pricing is a good way of elucidating the differences of appetite in the insurance market. At Brockwell, we will typically only cover the pricing of shareholder debt backed by a benchmarking study. However, other insurers may be comfortable with a wider range of transfer pricing risks.” notes Taylor-Whiteway.

Transact Risk Partners for example is able to offer cover for goods and services related transfer pricing, or look into risk where the available documentation is limited. Bos: “If no benchmark study is available in relation to financial TP, we offer the possibly of an in-house ‘min-benchmark’ to assess the feasibility of a TP policy. If the adopted TP position appears feasible, we can then prepare our own benchmark study as part of underwriting.”


More than half of respondents (59%) to ITR's survey on tax controversy said they expect tax authorities to be more aggressive during TP audits following COVID-19 disruptions and have less confidence about gaining tax certainty adding even further value to the use of TLI policies. Almost all advisors and tax directors (94%) surveyed expect more TP dispute cases in the near-future.

Given the global landscape due to COVID-19, in conjunction with the approach tax authorities are taking in relation to transfer pricing and substance in particular, the financial certainty of tax affairs for businesses has never been more important. Certainty that the well-established TLI market is well placed to provide.

With thanks to contributions from: Andrzej Pośniak, managing partner and head of tax at CMS Cameron McKenna Nabarro Olswang, Poland; Ben Jones, partner and head of London tax at global law firm Eversheds Sutherland; Sandy Bhogal, tax partner at Gibson, Dunn & Crutcher, London; Richard Taylor-Whiteway, head of tax at Brockwell Capital, London; and Staffan Bos, senior tax underwriter at Transact Risk Partners, Amsterdam.

Dean Andrews


Head of tax liability insurance

BMS Group

T: +44 (0) 20 7480 0308


Dean Andrews serves as head of tax liability insurance bringing more than eight years of M&A experience with some of the largest global advisers. He started his career at PwC, where he provided mixed tax advice to a range of international businesses and their owners, before moving to Eversheds Sutherland, where he primarily advised the private equity community and large corporates.

Dean has been a focused tax insurance broker for several years and has worked with tax advisers and their clients across Europe, the US, India and Australasia on matters ranging from VAT in real estate portfolio disposals to tax credits to share incentive schemes.

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