Coverage, policy period & timing A TLI policy would protect the insured (the taxpayer) against ‘losses’ arising from the insured offshore claim position. These losses include: (i) t ax due following the IRD’s assessment or determination, (ii) interest and non-criminal penalties (if applicable) (iii) d efense costs incurred by the insured in defending a challenge from the IRD; and (iv) t ax gross-up for payments made under the policy (if applicable) The policy period is typically aligned with the period during which the IRD can challenge the offshore claim (statute of limitations). Policy periods are normally 7 years but can be extended up to 10 years. It is possible to cover multiple fiscal years under one TLI policy. A considerable benefit of a TLI policy is the short time frame to obtain certainty: a policy can be put in place in as little as one to two weeks. Costs The premium is a percentage of the insured amount and is paid post-inception as a one-time-only premium. Pricing primarily depends on the strength of the tax position, while factors such as market conditions, amount and dispute history are also relevant. Premiums generally range between 2% and 6% of the sum insured. In addition to the premium, insurers charge underwriting fees to cover their costs to seek external tax advisors’ advice on the tax position to be insured. Claims An insurance 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 to underwrite a tax risk and a broker needs to carefully consider these factors when advising clients.
Insurers are sensitive when it comes to their reputation in terms of claims handling. Most insurers have in-house claims teams to warrant a streamlined, thorough claims process and practice shows that claims under TLI policies are being handled with due care. Tom Roth, who leads Liberty’s GTS APAC tax risk insurance practice, notes: “Insurers are being increasingly judged on their claims service, but there are significant differences in terms of how individual insurers are set up to handle claims. Selecting an insurer that has a specialist in-house claims handling function can save time and money down the line in the event that it becomes necessary to make a claim under the policy.” Required information To approach insurers and provide a sense of pricing and coverage for an offshore claim risk, BMS would need to receive the following information: 1. A copy of the tax opinion detailing (i) the tax- technical analysis; (ii) the financial exposure and (iii) the likelihood of the IRD’s success in challenging the offshore claim. 2. A calculation of the likely tax liability and associated costs (e.g. defense costs, applicable interest and penalties). Conclusion In Hong Kong, taxpayers face risks when seeking to rely on the territorial principle of taxation by which offshore profits are not chargeable to Hong Kong tax. While traditional risk mitigation strategies may lower the risk of challenges from the IRD, they may not fully eliminate it This is where TLI can be utilised to gain a critical risk management advantage: a TLI policy offers the taxpayer a quick and capital-efficient tool to eliminate a financial exposure by transferring the offshore claim risk to an insurer.
Contacts We hope you enjoyed the read. For a confidential discussion please contact us: Martijn de Lange Aris Wong Managing Director Managing Director T: +852 3579-5486 T: +65 6230-7987 M: +852 9772-9951 M: +65 8321-6236 martijn.delange@bmsgroup.com aris.wong@bmsgroup.com
BMS Asia Risk Solutions Pte. Ltd is registered by the Monetary Authority of Singapore as a direct insurance broker and a general reinsurance broker. 138 Market Street #05-01, CapitaGreen, Singapore 048946. Incorporated in Singapore (UEN: 202017234M). Switchboard: +65 6230-7980 BMS Asia (Hong Kong) Ltd, an Insurance Intermediary, licensed by the Insurance Authority. 4/F, Lee Garden Three, 1 Sunning Road, Causeway Bay, Hong Kong. Incorporated in Hong Kong (2955974). Switchboard: +852 3579 5490 This is a marketing communication. Formal terms of engagement must be agreed to secure the services of BMS Asia Risk Solutions Pte. Ltd and BMS Asia (Hong Kong) Ltd.
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