What we do
Tax
About
Tax insurance provides cover for all (or part) of a tax risk via an indemnity in the policy. Typically this is cover for an identified risk. The potential use cases are vast and range from mitigating a due diligence concern during an M&A transaction (often alongside W&I), to facilitating the issue of a derivative product to a hedge fund.
The policy period is typically 7 years from either the policy start date or completion of the relevant transaction, but Alpha TR can offer up to 10 years (e.g. in accordance with the statute of limitations).
The main reasons for using tax insurance are:
- Comfort: The fundamental use case is to provide additional comfort to facilitate commercial activity — a theoretical risk can still impair the ability to obtain favourable financing. Tax is complex and esoteric which motivates taxpayers to insure.
- Model Certainty: Insuring tax risk reduces volatility of returns — part of the 'product' offered to private equity fund investors is lower volatility than public markets.
- Ruling Alternative: Insurance can offer a quicker, more collaborative alternative to obtaining a ruling from a tax authority. A ruling request might also prompt a current or future tax authority audit, which is unwelcome.
- Trapped Cash: Tax insurance can avoid the need for an indemnity, escrow, price adjustment, or prevent other instances of committed capital or trapped cash.
- Requirement: Allocating identified risks to a third party can help parties fulfil their fiduciary and other duties. A fund will often be compelled to procure insurance under its fund documents, by its leveraged finance providers, or by an investment committee.
- Increased Cover: Tax insurance can enhance the financial cover otherwise available. Alpha TR can offer up to £40m per policy. We do not apply a minimum.
- Covenant Strength: Insurers offer significantly reduced credit risk when compared with individuals or entities that will be liquidated.
- Counterparty: The policy provides a counterparty to allocate risk to in order to remove an obstacle to a transaction, or provide a counterparty where there is otherwise none (e.g. non-M&A).
Examples
Tax insurance is regularly used to mitigate the following risks.
- Withholding Tax
- It is very common to seek protection against withholding tax risks, especially in the context of dividends, interest, and non-resident capital gains. Tax insurance can provide comfort on both substance and principal purpose.
- Contractors
- Contractors can be at risk of reclassification as employees such that they fall within payroll — a topic subject to high scrutiny by tax authorities. Alpha TR is able to offer cover for any loss that derives from a tax authority assessment, e.g. pension contributions and holiday pay.
- Fund Status
- Where a fund has undertaken unforeseen activity its tax-exempt status might be at risk. It is possible to provide an insurance policy to protect the fund’s tax treatment.
- Transfer Taxes
- A secondaries transaction can give rise to material transfer tax liabilities if the shares are deemed to derive the majority of their value from underlying real assets.
Appetite
We specialise in private capital transactions, especially within the following parameters:
Limit
Alpha TR can offer policies covering up to £40m per risk. We do not apply a minimum.
Geographies
Alpha TR's team have a diverse international track record (>50 jurisdictions insured) with particular expertise in Europe, MEA, and APAC. No geography is excluded from our appetite save for: Afghanistan, Belarus, Cuba, Iran, Myanmar, North Korea, Russia, Syria, Venezuela, and any jurisdiction which is subject to UK, EU, or US sanctions. Alpha TR has no appetite for risks where the Internal Revenue Service of the USA is the relevant tax authority.
Exclusions
All policies typically contain the following exclusions or otherwise restrict cover for: fraud or dishonesty; criminal acts; change in law; false representation in the policy representations schedule or a claim notice; failure to correctly implement any relevant transactions; failure to describe the risk externally as agreed with Alpha TR.
We are required by Lloyd's to exclude: war and civil war; terrorism; radioactive contamination and explosive nuclear assemblies; asbestos.
No Appetite
We have no appetite for the following risks:
- No defences
- If there are no defences for the position to be insured then Alpha TR has no appetite.
- No conduct
- Where insurers will have no input on the conduct of a dispute between the taxpayer and the tax authority in respect of an insured position then Alpha TR has no appetite.
- Tax Evasion
- Tax evasion is the criminal, intentional non-payment or underpayment of taxes. We do not have appetite for positions which constitute tax evasion.
- Criminality / Fraud
- We do not insure positions which constitute a crime (including fraud).
- Commercial Substance
- Where a position concerns a transaction that lacks commercial substance then Alpha TR has no appetite.
- Filing Position
- If a taxpayer is unable to file a return on the basis that the insured position is correct then Alpha TR has no appetite.
- Promoted Schemes
- Alpha TR does not have appetite for positions which are promoter-driven, mass-marketed tax schemes designed to defeat a legislative purpose.
- Non-Disclosure
- Where the taxpayer was required to disclose the position under mandatory reporting and knowingly and deliberately failed to disclose then Alpha TR has no appetite.
- Aggressive Positions
- If the tax outcome is supported by a strict reading of the black letter of the law, but was not intended by the lawmaker, is not accepted market practice, and is considered aggressive by Alpha TR’s counsel then we have no appetite.
- DOTAS
- If a position is reportable under the Disclosure of Tax Avoidance Scheme (or equivalent) rules then it is outside of appetite. This does not apply to mandatory reporting regimes (e.g. as commonplace in the EU); DOTAS specifically targets mass-marketed schemes.
- Non-Tax Trigger
- Notwithstanding that one of the heads of loss is tax payable, if one of the triggers for loss is not interpretation of tax law then it falls outside our tax insurance appetite.
- Contentious
- Generally Alpha TR does not have appetite for risks which are being litigated, or where the relevant tax authority has raised an assessment (or confirmed in writing that an assessment will be raised) in respect of the point to be insured.
Process
Each Tax risk is unique and so the process will vary on a case-by-case basis. The following steps are common to all projects:
- Submission: Alpha TR carries out a detailed review of the documentation received from the broker to assess insurability. A non-binding quote or a declinature should usually be issued within 48 hours of receipt of the submission. A quote will typically remain valid for 30 days.
- Expense Agreement: Prior to commencing underwriting, Alpha TR will either issue an expense agreement whereby the prospective insured contractually commits to cover Alpha TR's external advisory costs, or invoice for such costs up-front. All transactions are underwritten by Alpha TR, but external advisers are instructed on each deal.
- Underwriting: Alpha TR will raise underwriting questions, including document requests, to assess the risk and build a defence file (if required).
- Policy: We will draft a policy reflecting the coverage offered in the NBI, although this may be amended to reflect underwriting or where an NBI assumption is not correct.
- Timing: The underwriting process can be completed in five business days from receipt of all relevant information provided that Alpha TR receives prompt, high quality responses to Q&A.
See how a tax insurance claim is handled on our Claims page.