Insurable CGT risks Insurers generally underwrite CGT risks with a low probability of materializing but high severity. Furthermore, there must be a sound legal basis for the tax position being taken; insurance cannot be obtained for an incorrect CGT position based on detection risk. Before considering underwriting a CGT risk, insurers will require an opinion/memo from a reputable law or advisory firm supporting the CGT position’s technical soundness. Such advice should detail: 1. the tax-technical analysis of the CGT position; 2. financial exposure; and 3. likelihood of NTS’ success in challenging the CGT position before the tax court. 7 There is a good appetite to underwrite Korean tax risks. Steven Harwood, Regional Head of Transactional Liability – Asia Middle East for Berkshire Hathaway Specialty Insurance, notes the following: “At BHSI we make a qualitative assessment of any tax risk for which insurance is being sought. We consider matters such as the nature of the risk; the tax-technical analysis; the quantum of risk exposure and the jurisdiction involved. Particularly with respect to the latter, we think South Korea is an interesting jurisdiction because of the strong rule of law and apparent consistency in the application of tax laws by courts.” Coverage, policy period & timing A TLI policy would insure the taxpayer against ‘losses’ arising from an insured CGT position. These losses include: (i) tax due following NTS’ assessment or determination (ii) interest and non-criminal penalties (if applicable) (iii) defense costs incurred by the insured in defending a challenge from the NTS (iv) tax gross-up for payments made under the policy (if applicable) Policy period is typically aligned with the statute of limitations. A TLI policy can be executed within two weeks. Costs The premium is a percentage of the insured amount and a one-time-only payment. Premiums range between 2%-6% of the limit of liability insured. Pricing primarily depends
on factors such as (i) strength of the CGT position; (ii) jurisdictions involved; (iii) amount of the financial exposure and (iv) dispute history of the insured. Additionally, insurers charge underwriting fees to cover their costs for external advice on the insured CGT position. Claims A TLI policy is only effective when it pays out in the event of a valid claim. Claims handling procedures and track records are critical factors when selecting an insurer and BMS always cautiously considers these factors when advising clients. Insurers are sensitive to their reputation when it comes to claims handling. Most insurers have in-house claims teams to warrant a streamlined claims process. Practice illustrates that claims under TLI policies are being handled with due care. Harwood, outlines that: “We operate our global business on the philosophy that “Claims is our Product”. Tax risks are complex by their very nature so it’s particularly important for customers to be confident that their insurer will engage and deal with a claim, however it may arise. We have a dedicated and experienced claims team located in Asia which, coupled with our long-term commitment to the market and a strong balance sheet and security rating, gives customers the reassurance they need in selecting BHSI as their risk carrier.” Required information To approach insurers and obtain pricing and other terms for a CGT risk arising from a Korean M&A transaction, BMS would need to receive the following information: 8 1. details of the M&A transaction 2. copy of the tax opinion/memo 9 3. calculation of the potential financial exposure and associated costs Conclusion In Korean M&A transactions involving foreign PE funds, uncertainty often arises regarding the identification of the beneficial owners under the CGT rules and which deal parties bear the risk. This is where TLI steps in. A TLI policy offers deal parties a quick and capital-efficient solution to take the risk off the negotiation table by covering a potential financial loss arising from a successful challenge of the agreed CGT position. This way, no party bears the risk and indemnities and holdbacks can be avoided.
7 Insurers usually won’t require a percentage to be attributed to the chance of success if challenged, rather they would wexpect to see a ‘should’ level of opinion. 8 This information would be subject to Non-Disclosure Agreements. 9 A tax opinion or advice would normally be provided to insurers on a “non-reliance basis”.
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