Tax-related uncertainty is often more common than many business leaders realize. It can create financial risks, delay decisions, and affect investor relationships.
Take the example of a technology company preparing to raise capital from an international investor. After seeking professional tax advice, senior leaders believe the company’s structure is compliant with tax regulations. But there is still a chance that a tax authority could challenge that position, even years later, potentially leading to a significant and unexpected tax bill, which would alter the expected returns of the investment.
Tax insurance provides a practical potential solution. It helps businesses and investors manage specific tax risks by providing financial protection if a covered tax issue is challenged in the future.
What is tax insurance?
Tax insurance is designed to protect businesses, investors, and shareholders from financial losses arising from certain tax risks. This specialized product helps to absorb financial consequences when a tax authority challenges a tax position, resulting in additional taxes, interest, or penalties.
For example, a company that completes a corporate restructuring based on advice from tax professionals might believe the transaction qualifies for a particular tax treatment. But there is a possibility that a tax authority could reach a different conclusion. Tax insurance can provide protection if that challenge ultimately results in a financial loss.
Tax insurance can be used in mergers and acquisitions, investment transactions, restructurings, international operations, and other business activities involving potential tax exposure. It is also increasingly used to mitigate companies’ day-to-day risks. Rather than eliminating the risk itself, it transfers all or a portion of the financial exposure from the business or investor to the insurer.
Benefits of tax insurance
One of the primary advantages of tax insurance is financial protection. Unexpected tax assessments can be costly and may significantly affect a company’s profitability, cash flow, or investment returns. Insurance helps protect against these unforeseen financial impacts.
This is true for both companies and individuals, who may face tax risks in cases where tax authorities challenge the tax treatment of investments or other tax positions, potentially resulting in unexpected tax liabilities.
Another important benefit is greater certainty. Business leaders and investors often need to make decisions in the face of significant uncertainty. Tax insurance can provide increased confidence that a specific tax issue is not likely to create a major financial surprise in the future.
Tax insurance can also help facilitate transactions that might otherwise be delayed or abandoned. In acquisitions and investment deals, parties sometimes disagree about who should bear a particular tax risk. Instead of lengthy negotiations or even terminating the transaction, insurance can provide a solution that allows the deal to move forward.
The benefits of protection can extend beyond companies themselves, with relationships with investors, shareholders, private-equity funds, and other stakeholders impacted by reducing exposure to uncertain tax outcomes.
Why is tax insurance becoming more popular around the world?
The global tax-insurance market is expanding rapidly, with growing sophistication and broader adoption across major regions. This growth is driven by several factors.
First, tax rules are becoming more complex. Governments continue to introduce new regulations and reporting requirements. As complexity increases, so does uncertainty.
Second, businesses are operating internationally more than ever before. Companies frequently serve customers in multiple countries, attract foreign investment, and expand across borders.
Third, there is a growing focus on protecting capital. Investors and companies want to reduce risks and preserve value.
As a result, tax insurance has become a common tool in major transactions and investments worldwide.
The rise of tax insurance in Israel
Israel’s business environment has become increasingly sophisticated, as well as globally connected, creating favorable conditions for the growth of tax insurance. The country’s vibrant technology sector, active investment community, and strong track record in mergers and acquisitions and cross-border transactions create new opportunities for Israeli companies to expand internationally and attract global investors.
But as they do so, they often encounter more complex tax considerations that require careful management.
At the same time, awareness of tax insurance continues to grow among Israeli companies, investors, and various other stakeholders. Many professionals who previously encountered tax insurance only in large international transactions are now considering it for a broader range of business situations.
As Israeli companies continue to expand internationally and navigate increasingly complex tax issues, tax insurance may play a growing role in helping them manage uncertainty with greater confidence.
As always, consult experienced professional advisers in each country concerned at an early stage in specific cases.
Peter.Teishev@marsh.com
The writer is senior vice president and head of special risks at Marsh Israel in Ramat Gan.