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Tax Insurance

InterpretationGap® offers coverage for loss incurred as the result of one or more tax positions or tax treatments being challenged and disallowed by the relevant tax authority. 

InterpretationGap® Tax Insurance can reduce or eliminate uncertainty relating to the outcome of one or more tax issues by providing reimbursement for financial loss incurred as a result of a successful challenge by the relevant tax authority.

The product can also be an effective complement to private letter rulings. As private letter rulings are issued in reliance upon representations made in the ruling request, an InterpretationGap® policy can provide a taxpayer with protection for certain representations that it has made in reliance upon statements made by a third party, such as the party that sold the asset or business at issue.

In addition, to further align the policy with the specific tax issue(s), InterpretationGap® Tax Insurance can be designed to:

  • cover the subject matter of a tax opinion or tax indemnity, although an opinion or indemnity is not required for the insurance to be put in place to provide coverage for the specific tax issue(s)
  • match the statute of limitations for the specific tax issue(s), up to 84 months. Longer policy terms may be available on a case-by-case basis.

InterpretationGap® is available for specific tax issues that arise in a taxpayer’s ordinary course of business, as well as for general pre-closing tax liabilities in connection with acquisitions.

InterpretationGap® Case Studies

One of the largest shareholders of the target company in a proposed sale is a private equity fund. While the fund is willing to provide a tax indemnity in the form of a tax deed for any exposure that is identified during the first twelve months after the transaction closes, the buyer has required an indemnity that survives for seven years as respects all pre-closing tax liabilities. Providing an indemnity of this length will prevent the private investment fund from proceeding with its planned liquidation soon after the twelve month anniversary of the proposed transaction’s close.

The board of a company, engaged in both the manufacture of office supplies and the development of business software, has determined that its two business segments could operate more efficiently as separate entities. It is intended that the office supply business will be demerged. While the company has received a tax opinion from a reputable law firm that the demerger should be tax free, the analysis is a “facts and circumstances” analysis. As such, the board is concerned that the HMRC unexpectedly will contend that there is an insufficient business purpose or trading benefit to support the tax free demerger. While the risk of such a finding is remote, neither the demerged business, nor the remaining business have the ability to incur the approximately £20 million in unexpected tax and interest that would become due if there was a determination that the demerger was not tax free.

The target company in a pending transaction has historically engaged a number of individuals as independent consultants to provide accountancy services in respect of the target’s business. Following due diligence, the buyer is concerned that the individuals may be found to have been in employment with the target company, giving rise to potential liabilities to PAYE and National Insurance Contributions (including interest). The seller is confident in its tax analysis and is unwilling to provide any security or “hold back” from the sale price in respect of this identified risk.

During the due diligence process for a pending acquisition, it is discovered that the target company inadvertently did not make a required tax election. The regulations of the relevant tax authority provide that relief for such an inadvertent error may be sought, however, the timeframe for receiving the relief is approximately six months. If the relief is denied, the target company could face significant additional tax liabilities. Tax advisors to both the proposed target and buyer agree that given the facts, the risk of relief being denied is very low. However, the buyer is neither willing to assume the risk nor agree to delay the transaction for six months. An InterpretationGap® policy may be obtained by the buyer to respond in the event the tax authority refuses to provide relief for the inadvertent error.

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Frequently asked questions

Our InterpretationGap® policy can be offered to cover tax exposures arising in Europe, the United States, Canada, Australia, New Zealand, and South Africa. Please contact us if you seek insurance for tax exposures in other jurisdictions.

While a tax opinion is helpful, it is not required. A memorandum setting out the fact pattern associated with an analysis of the tax exposure by a professional tax advisor will generally provide us with adequate information to provide you with preliminary terms.

Yes. We sometimes offer InterpretationGap® Tax Insurance in situations where a taxpayer’s auditors require that reserves be posted despite agreeing that the practical risk of a tax liability ultimately crystalising is unlikely.

“Loss” can include the taxes associated with the insured tax exposure, interest on those taxes, gross-up, and in some jurisdictions, civil penalties where they are insurable by law.

As part of the underwriting process, Ambridge will request a description of how the requested limits have been calculated. This should be prepared by the insured together with its tax advisor.

Generally, we can provide preliminary terms within 24 to 48 hours. Completion of full underwriting is dependent upon how quickly detailed information is provided to Ambridge. Ambridge frequently can offer bindable terms within several days after receipt of the initial submission.

We can be most responsive to your request if you are able to provide:

- a description of the tax exposure for which insurance is desired

- an outline of all facts that the potential insured’s tax advisors believe are relevant to analysing the exposure

- a calculation of the quantum of the potential tax exposure, the amount of insurance requested, and the reason(s) for requesting that amount of insurance

- confirmation that the tax exposure is not associated with a tax shelter, “reportable transaction”, or “transaction of interest”

- any analysis done by a professional tax advisor.

No. Ambridge’s InterpretationGap® Tax Insurance product is only offered in connection with tax exposures where a taxpayer’s filing position is consistent with what it believes to be proper based upon advice from tax advisors.