(Transactional) Tax Insurance
Tax Insurance reimburses a company for additional taxes, interest and penalties that are incurred with respect to covered tax positions. Defense costs (commencing with a lawsuit) and the “gross-up” costs (income tax on receipt of the insurance proceeds) may also be covered.
The Benefits Provided:
- Cash Flow/Liquidity Volatility. Insurance proceeds avoid negative cash flow.
- Disclosure Issues. FIN 48 requires that companies provide detailed disclosures indentifying tax issues for “material” positions that are “reasonably possible” to “significantly” increase or decrease within 12 months of the reporting date – creating a potential “road map” for taxing authorities engaged in an audit. Tax insurance may be a factor considered in determining whether a position is sufficiently material to warrant disclosure. [click here for more information on FIN48 Insurance]
- Preparing To Sell. Tax (and FIN 48) analyses are already routinely requested as part of a buyer’s due diligence – providing the buyer with arguments for higher escrows and/or indemnity ceilings and/or a lower purchase price. Tax insurance may hasten the due diligence process and reduce the scope of negotiations.
- Loan and Lease Covenants. If the uncertain tax position results in FIN 48 charges, the insurance may render as immaterial any “technical” violations of loan and/or lease covenants resulting from the FIN 48 charges.
- Acquisition Planning. If tax due diligence raises an issue, tax insurance may facilitate resolution of the issue and financing.