04 July 2024
Tax Liability Risk and the Aerospace Industry
The Aerospace industry continues to see consolidation across different segments including airline operators, aerospace manufacturers and aviation service providers. It is in the context of the continuing industry appetite for mergers & acquisitions transactions, that we felt it would be useful to highlight the risks arising from potential tax liability and the availability of tax liability insurance to mitigate such risks.
Our Gallagher colleagues from the specialist Transaction Risks team have outlined the background to the topic of tax liability and cite some case studies to elaborate on how tax liability insurance can be effectively engaged to support any industry transactions.
Border control
Pressure continues to pile onto governments around the world, after many years of difficult economic conditions and growing budget deficits. The taxman is being encouraged to ‘look under the sofa’ to find more tax revenue to fill their depleted coffers.
Tax authorities are doing this by focusing on:
· Large, multi-national companies, private equity investors, and cross-border capital flows.
· Challenging taxpayers more aggressively on more marginal tax positions, where in the past they would have been willing to give businesses the benefit of the doubt.
Grey skies
Tax is not black and white – it is a world of grey, and only becoming greyer as new rules, guidance and cases need to be navigated. There is never a shortage of work for tax lawyers and accountants.
Even when companies and their advisors have a solid basis for concluding they are on the right side of (any given) tax rule, there is a risk that a tax authority will apply the law differently to that company’s fact pattern.
Tax is particularly complex for aerospace, one of the most global sectors. Key risk areas can include VAT, withholding taxes, double tax treaties, capital allowances, and residency laws, all of which differ drastically from country to country.
Tax is not black and white – it is a world of grey, and only becoming greyer as new rules, guidance and cases need to be navigated.
Charting a more certain course
A tax insurance policy is a tool used to ring-fence a specific, identified tax risk. Almost always, what is being covered boils down to an unclear question of legal interpretation. Policies cover the risk that the tax authority:
· Identifies the ambiguous tax position (e.g. during routine filings or an audit);
· Challenges the taxpayer (a formal investigation/assessment/audit); and
· The matter goes to court;
· The tax authority wins.
The more convincing the analysis provided, the lower the pricing. Your lawyers/accountants' analysis must conclude that the taxpayer has the stronger position. Tax insurers are not in the business of taking 50:50 bets.
Avoiding major turbulence during important journeys
We primarily advise clients about tax insurance, in a corporate finance context, e.g. an M&A transaction (60% of enquiries), or a major re-structuring or (re-)financing.
Low probability but high potential quantum risks are inherent in most large businesses. They tend to come to the surface and create headaches during a key set-piece event, involving multiple decision-makers with varying risk appetites.
In an M&A context, tax insurance is often used as a cost-efficient alternative to a specific indemnity, escrow arrangement or price chip.
It is also becoming increasingly common:
· For lenders (rather than principals) to be driving tax insurance.
· To ring-fence such risks as part of business as usual risk management, or with tax filings and audits (or a future sale) in mind.
The global tax insurance market
The global tax insurance market has grown rapidly in response to demand; with more than 20 insurers now willing to consider enquiries across all sectors. All employ ex-tax lawyers/accountants as underwriters. Tax insurance is most common in North America and Europe, but is increasingly possible around the world.
Whether it’s being used as part of a mergers & acquisitions transaction or to address an ongoing business risk, tax liability insurance can be a powerful tool to create value and reduce uncertainty around a company’s tax-related risks.
For more information on how the Transaction Risks team at Gallagher can help you better appreciate the application and benefits of tax liability insurance please contact your Aerospace Account Executive, who will be happy to arrange a conversation with the specialist team.
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