Tax liability insurance and VAT: An important tool to protect transaction partners

Tax liability insurance (TLI) has become an extremely effective and widely applied tool to protect the VAT taxpayer’s position, especially in the context of merger and acquisition (M&A) deals, where it is used to facilitate transactions by removing contentious issues from negotiations.

Dean: Which VAT issues do you most frequently see arising in an M&A context?

Geert: There are three categories of ‘VAT-evergreens’ that regularly arise in M&A transactions.

First, there are VAT issues generated by the transaction itself. An example would be that certain goods are often carved out of the scope of transactions, which could lead to a correction of earlier deducted input VAT on these goods.

Further, VAT issues may materialise in the acquired company after – or sometimes even during – the acquisition process. Such risks may have been considered, or not, during the due diligence process and may have been included, or not, in the representations and warranties.

Finally, certain VAT issues may result from post-acquisition structuring, for example, changes imputed in an existing VAT group by including the acquiring company in it, or VAT issues resulting from a merger between group companies, etc.

Dean: That is certainly our experience of the type of VAT risks that we frequently see arising in an M&A context across Europe, which are frequently insured. In relation to your point about issues arising during the acquisition process, the most common reason for a TLI policy being taken out is to cover a potential tax issue, be it VAT or otherwise, that is flagged during the diligence process.

What are the financial consequences of getting your VAT filing position wrong in Belgium?

Geert: If VAT becomes due as a result of a VAT inspection in Belgium, the additional VAT levied often corresponds to 21% (standard VAT rate) of the value or price of the targeted supply of goods or services, increased by a VAT penalty, often amounting to 200% of the VAT due.

The financial consequences therefore are very substantial which means a TLI policy can be an extremely cost efficient tool to transfer risk from a company’s balance sheet.

Dean: How frequently do you see companies seek a preliminary ruling from the Belgian tax authorities with respect to potential VAT risks?

Geert: Corporate taxpayers file on ruling requests with the Federal Ruling Committee on a regular basis. However, such a VAT-ruling can only be applied for transactions which have not yet occurred. As a result, VAT risks related to past transactions or events cannot be covered by such a formal VAT ruling. Furthermore, applying and obtaining a positive ruling can easily take up to four months after the request introduction, all formalities and approval procedures included. Finally, parties often do not want to run the risk of first revealing specific VAT issues to the tax authorities without being reasonably sure on the positive outcome of the ruling request.

Dean: Is there a specific limitation period to be considered for VAT disputes with the Belgian tax authority?

Geert: Based on Article 81bis of the Belgian VAT Code, VAT can be corrected or (re)claimed by the VAT authorities during a period of three years. This correction period however amounts to seven years, in case certain infractions or irregularities occur. Although the seven-year period is often referred to as the ‘fraud period’, it should be noted that the infractions or irregularities concerned are defined in a very broad manner.

For example, the seven year period applies in case “an investigation indicates that a transaction has been exempted from VAT on an unjustified basis” (Article 81bis, §1, section 2, 1° VAT Code). As a result, a seven years’ contractual period for the TLI is indeed recommended for VAT-taxpayers seeking adequate security.

Dean: How frequently do you see TLI being used to insure VAT risks?

Geert: In Belgium, TLI is not yet generally applied, and even fewer policies – if any – focus exclusively on VAT risks.

Dean: What do you think could be done to increase the use TLI across Belgium to bring it more in line with the rest of Europe?

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