BMS TLI Managing Tranfer Pricing risks – 0521-01

Tax Liability Insurance Managing Transfer Pricing risks

Tax Liability Insurance (TLI) policies are a cost effective tool to transfer a potential tax exposure from a business to the insurance industry, particularly in order to protect multinational enterprises (MNEs) against unexpected tax bills by removing potential Transfer Pricing (TP) exposures from their balance sheets.

Continued globalisation and increased economic pressures has seen businesses continue down the path of rationalisation and integration, in order to unlock greater efficiencies. As a result, TP has undoubtedly become one of the key tax risks faced by MNEs. This trend, coupled with the ever increasing focus of tax authorities on TP and arm’s length principles, means that all businesses need to consider how to best manage the ongoing risks associated with intra-group arrangements. TLI offers certainty to businesses seeking to mitigate TP risk and can be implemented at any time; whether in the context of a sale and purchase process, a group reorganisation, to replace the need for an advanced agreement or as an operational tool in a business’ ongoing tax management strategy.

Jurisdictions

Pricing model relative to Benchmark

Sector approach to TP

Factors to consider

TP Documentation and Policies

Nature of intra-group arrangements

What are the benefits of TP Insurance?

•  Allows an M&A transaction to proceed without price or capital ramifications.

•  Promotes adherence to internal TP policies.

•  More efficient than seeking prior agreement with tax authority.

• Allows for greater financial confidence at a fixed cost.

What factors will affect the availability and price of a TP Insurance policy?

1  Jurisdictions The number and location of jurisdictions involved in the intra-group arrangements will impact on the price and underwriting process for the policy. Generally single jurisdiction arrangements will be simpler to insure than complex cross-border arrangements. The jurisdictions in question will also impact an insurer’s appetite and the pricing. 2  Pricing model relative to benchmark Where a more ‘aggressive’ TP approach has been adopted, this will impact on an underwriter’s appetite to insure the risk. 3  Sector approach to TP Underwriters will consider the sector’s standard approach to TP modelling and whether the business sector presents any particular risks associated with TP. Taxpayers in industries where intangible assets are a key value driver for the business, such as the fashion industry, are exposed to significant transfer pricing risks while there may be lower risks for a business in the consulting industry, where people are usually the key value drivers. 4  Nature of intra-group arrangements ‘Financing’ TP arrangements, which generally have a lower risk profile due to the ready availability of comparable data, will be simpler to insure compared to TP arrangements related to ‘Goods and Services’ or ‘Royalty payments’. 5  TP documentation and policies Availability and extent of transfer pricing documentation will be a significant factor when determining the availability of insurance. While some insurers may be able to consider providing cover where no benchmarking is available in relation to ‘Financing’ TP arrangements, there is extremely limited appetite to do so for ‘Goods and Services’ or ‘Royalty payments’.

Appetite to insure TP risk varies across the market and using a broker who appreciates these differences, and how this will impact on the availability of a policy for your business, is important. The BMS team has dedicated in house tax counsel and TP specialists that work with our clients and their advisers to ensure that a tailored insurance solution is acquired, wherever in the world it is needed.

Continued Coverage: TP Insurance Renewals Clearly, TP issues present an ongoing operational risk for businesses. In response to this, there is a growing appetite in the insurance market to provide TLI policies that can be renewed annually.

• Additional premium – This will be a fraction of the original premium given that the renewal policy covers only those tax authority challenges that may arise relation to the previous 12 months. Periodically, an updated benchmarking exercise may also be required, depending on what is considered appropriate for the sector. There is appetite to provide forward looking cover in this regard, also on a 12 month renewal basis. Ultimately, the level of diligence required for a TLI policy in relation to TP risk is no more expansive than the level of diligence a prudent tax payer would conduct to evidence its TP policy in the absence of insurance.

Such policies provide continuous cover in relation to TP risks while the underlying premise for TLI remains the same; a policy is placed based on the technical analysis of a risk, providing cover in the event that a tax filing position (at or before the date the policy is placed) is challenged by a tax authority. What would be required at the point of renewal? • Some level of top up diligence – Business tax advisors would conduct a high level review to confirm that no circumstances arose necessitating a TP adjustment in the previous 12 months.

What do we need from you to get started? The BMS team will be able to guide you on the information and documents required.

An overview of the TP risk and context in which it arose.

A copy of an opinion/ memo detailing the tax-technical analysis, the financial exposure and the likelihood of the tax authority’s success in challenging the tax position.

A calculation of the likely tax liability and associated costs (e.g. defence costs, applicable interest and late payment penalties).

A summary of the underlying transaction (in the case of an M&A related TP risk).

Contacts Please contact the team at m&a@bmsgroup.com or alternatively speak to one of the teammembers directly:

Dean Andrews Head of Tax Liability Insurance T: +44 (0)20-7480-0308 M: +44 (0)7876-815-643 dean.andrews@bmsgroup.com

Jessica Bradley Associate Director

Martijn de Lange Managing Director T: +852 3579-5486 M: +852 9772-9951 martijn.delange@bmsgroup.com

T: +44 (0)20-7374-5109 M: +44 (0)7880-443-186 jessica.bradley@bmsgroup.com

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