Buyers and sellers often struggle to allocate and account for identified tax risks when negotiating the Target sale. This can be caused by conflicting views on the risk and different risk appetites, for instance. In case identified tax risks present significant financial exposures, a misalignment may cause parties to pull the plug on the transaction altogether. This is where tax insurance can add tremendous value, as illustrated in the below example:
Alpha Capital (Seller), a private equity fund tax resident in Country A, intends to sell 100% of its shares in a Beta Corp (Company), a portfolio company tax resident in Country B, to Gamma Inc. (Buyer), an MNC. The transaction value is USD 500m and Seller expects to derive a gain of USD 100m from the sale.
Per external tax advice, Seller intends to claim an exemption for capital gain tax (CGT) in Country B by virtue of the application of the tax treaty between Country A and Country B. However, there is a (low) risk that Country B's tax authorities challenge Seller’s tax position and disallow the exemption. In case they are successful, the tax bill is ~USD 20m, and Country B's tax authorities would collect this amount from the Company or the Buyer.
Seller and Buyer disagree on the allocation of said risk. Seller argues that the risk is low and is unwilling to indemnify the Buyer for any losses. Buyer refuses to take on the risk of paying USD 20m. As a result, the discussion prolongs, and the deal is at risk.
To solve the issue, parties decide to procure a tax insurance policy with a limit of USD 20m. BMS assists and recommends Insurer Delta following a comprehensive review of the pricing, coverage, and claims track record, among other things. With the CGT risk off the negotiation table, parties continue to seal the deal.