Contingent Tax (Liability) Insurance
Whereas tax coverage under a W&I policy generally covers unknown tax risks resulting from a breach of the tax warranties and the tax indemnity obligations given by the seller, a bespoke Tax Liability Insurance policy covers losses from known/identified tax risks which are uncertain or difficult to quantify.
Such risks often arise out of a legal conclusion on a specific tax position (question of law rather than a question of fact) adopted by the target, which could potentially be the subject of future challenges by tax authorities.
Such insurance is unlikely to be available for promoter-driven, repetitive or purely tax motivated transactions or those cases already subject to an audit, involved in litigation or on appeal from a tax authority.
What information do we require?
A detailed note from an external tax advisor (tax opinion) setting out:
■ Description of the underlying facts and circumstances (the background),
■ Description of the risks (potential tax liability) arising out of those facts and circumstances,
■ Legal analysis of the likelihood of the risk(s) materialising (risk rating),
■ Calculation of the maximum risk exposure (quantum of the risk),
■ Detailed explanation and analysis of the technical defences available should a claim be brought,
■ Opinions or notes from the insured’s advisors or counsel, and
■ Declaration/representation of all material facts