Managing Tax Risk Through Tax Insurance

Transcription

1 Aon Risk Solutions Aon Transaction Solutions Managing Tax Risk Through Tax Insurance Risk. Reinsurance. Human Resources.

2 Transactional Products from Aon Transaction Solutions Representations and Warranties Insurance Tax Opinion Insurance and Tax Credit Insurance Litigation Buyout Insurance Fraudulent Conveyance Insurance Successor Liability Insurance Environmental Insurance Customized Solutions for Similar Risk

3 The Aon Advantage Aon Transaction Solutions ATS includes experts recognized across the industry for experience in developing innovative, cost-effective tax insurance solutions for reducing or eliminating tax risk. The Aon team is unique within the insurance industry in terms of our focus on Tax Insurance as an area of specialty and our experience with the product dating back to its earliest use. In 2015, Aon placed policy limits across all types of transactional risk globally of approximately US $13 billion. Of that, about US $3 billion was for tax insurance, which represented over 90% of tax insurance underwritten worldwide. This included several large programs over US $400 million. Aon Transaction Solutions is the largest transaction liability team in North America, now with 16 professionals on staff, mostly lawyers with previous M&A, Tax and deal experience, in New York City, San Francisco, Washington, DC, Boston, Chicago, Houston, Philadelphia, and Toronto. Our professionals can also draw on the full resources of our Transaction Liability practices worldwide in Bermuda, the United Kingdom, Australia and Asia. Protect Yourself Against Unexpected Tax Liabilities Today s tax structures and their legal, financial and business implications are rapidly growing in both size and complexity. Tax Insurance coverage is designed to protect against the failure of a transaction or situation to qualify for its intended tax treatment. Similar in effect to a private letter ruling, Tax Insurance brings certainty to taxpayers as to the treatment of their tax positions, including U.S. federal, state, local and/or foreign taxes. By providing assurance against the unanticipated or ill-timed occurrence of a tax loss, Tax Insurance is an effective and economic means of protecting against an unpredictable or catastrophic drain on cash flow and earnings. Aon clients that have relied upon Tax Insurance include private equity sponsors and portfolio companies, Fortune 500 industrial and financial services companies and other participants in M&A and financial transactions in the U.S. and internationally. A Proven Approach Tax Insurance is a product with a long and successful history. It has been written by the insurance markets for the Fortune 500, private equity and middle market companies since the early 1980s when Lloyd s of London covered investors in lease transactions against loss of projected tax benefits. Since that time, a specialty insurance market has been supported by skilled insurance intermediaries like Aon Transaction Solutions that help companies manage tax risks of all types, ranging from tax credits for renewable energy and low-income housing to M&A-driven issues such as whether a tax-free reorganization will be respected to risk facing a company absent a transaction, such as an internal reorganization or transfer pricing. With Tax Insurance, organizations can Gain an alternative to a private letter ruling from the IRS Address the small probability of catastrophic loss Allocate the economic risk of a tax loss Mitigate counterparty credit risk in tax indemnity agreements Replace, reduce or enhance escrow requirements Extend the survival of (or add to) the amount of seller indemnity Avoid posting FIN 48 reserves in specified cases

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5 M&A and Other Transactions Aon experts provide a range of solutions to help address transactional risk in M&A and financing transactions. Tax Insurance and other transactional insurance products are an effective tool to efficiently structure a transaction that allows a seller to provide a smaller escrow or less indemnification. At the same time, the buyer still receives the traditional protections via insurance. Tax Insurance and transactional products also provide a mechanism for sellers to insure their contingent liabilities. For M&A in particular, the real benefit of a Tax Insurance policy is that it provides certainty and often allows a buyer and seller to move past a difficult negotiation over an uncertain issue and close a deal. This frequently arises with a disproportionately large tax exposure that may not be resolved for many years. In addition, Aon s Tax Insurance team and our underwriters specializing in Tax Insurance can often bring added value with respect to pricing, terms and encouragement for the deal to move forward in a timely fashion. Examples of Insured Risks Tax Opinion Insurance Tax Credit Insurance M&A Tax-Free Spin Offs Tax-Free Reorganizations/ Restructuring REITS S Corp Qualification/ 338 (h)(10) elections Deferred Compensation 409A Transfer Pricing Capital vs Ordinary NOL Carryforwards Tax Credit Qualification Lease Structure Partnership Structure Qualified Basis Historic Tax Credit Renewable Energy Tax ITC/PTC LIHTC MNTC Recapture State Tax Credits Key Features of Tax Insurance Policies Policies identify covered transaction and intended tax treatment. Typical policy periods are up to six years on a noncancellable basis. Where circumstances require, longer periods may be available. Policies typically cover tax, interest, penalties and a gross up for tax on the insurance policy proceeds. Straightforward policy wording is provided with minimal exclusions (meaning a misrepresentation by the Insured). The policy wording is manuscripted (or customized) for each transaction. An aggregate limit of liability is specified. The underwriting process is fast and can accommodate accelerated deal timelines. Tax opinions are not required (although such opinions can make the underwriting process more efficient). Insurance premiums are tax deductible. Insurers require specified rights to participate in material decisions surrounding a contest with a tax authority. Any settlement with the taxing authority must be approved in advance by the insurers.

6 Protecting Tax Equity Tax credits are a staple in the federal and state government s toolbox to encourage different types of investments. Institutional investors (also known as tax-equity investors) often monetize the tax credits and provide a source of funding for the projects involved. Tax-equity investors, however, are passive parties to the investment and are subject to a number of tax risks. These include the investment structure not being respected, the transaction not qualifying for the projected tax benefits or the loss of tax benefits through recapture. Tax Insurance helps manage these risks and was identified by the IRS in Rev. Proc as a preferred vehicle for doing so over guarantees by transaction parties. We also have arranged coverage protecting tax-equity investors against retroactive change in law and nonperformance by state and local governments with respect to refundable tax credits.

7 Tax Insurance has been used to protect tax-equity investors in the following areas that provide federal tax credits: Renewable Energy Solar, Wind and Biomass The federal government and a number of states provide an investment tax credit for a percentage of the cost of various types of renewable energy projects, most notably solar and wind. The federal ITC is now available through Tax Insurance can protect tax-equity investors in the event that the investment structure and allocations are not respected, the investor does not qualify for the projected credits or tax credits are recaptured during the five-year recapture period. In 2015, tax insurance was first used to support ABS transactions securitizing cash flows from residential solar transactions by insulating the debt investors from the risk of a challenge to the qualified basis. New Markets Tax Credits The federal tax code authorizes a 39 percent tax credit for many types of investments in low-income communities, ranging from housing to commercial enterprises. This tax credit is earned over seven years and is subject to recapture under specified circumstances. Insurance can be used to protect against specified events of recapture. Historic Rehabilitation Tax Credit Insurance The federal tax code provides for a credit against tax for 20 percent of qualified expenditures of specified historic structures in the year a rehabilitated building that meets DOI standards is placed in service. This credit vests over five years and is subject to recapture for various reasons during that period. In this context, insurance can protect against the impact of a loss of the historic structure as well as loss of the credit due to the investor s failure to qualify or to various recapture events. Affordable Housing The federal tax code provides a 10-year stream of tax credits for building affordable housing and renting it to qualified tenants. Failure to operate the project in compliance with the tax rules can result in the recapture of credits. Tax Insurance can be used to help protect institutional investors in funds owning these projects. In addition, Tax Insurance has been used to protect against the failure of the IRS to respect specified tax treatments in credit transactions.

8 Case Studies Notable Recent Tax Insurance Transactions Protection of tax equity investors in renewable energy projects (solar and wind) qualifying for Federal and state tax credits against failure of the transaction structure to be respected, failure to qualify for the tax credit and recapture The largest tax insurance policy in over 10 years a $400 million policy insuring that a multinational corporate reorganization did not trigger FIRPTA tax A policy bound after a formal challenge from the IRS a $75 million program for a client s worthless stock deduction Protection of debt investors in securitizations of residential solar receivables against interruption of the cash flow following a successful challenge to the qualified basis of the solar equipment and the failure of a tax indemnity agreement A large policy for a Fortune 500 multinational managing the risk that the IRS will disagree with its methodology for sourcing foreign losses to the U.S. Tax insurance programs for purchasers of private REITs against failure of the target entity to qualify as a REIT Mexican transfer pricing risk that a buyer became exposed to in an M&A transaction Policy Development Under a Tight Deadline A non-u.s. company sought to purchase the shares of a U.S. manufacturing corporation from a private equity (PE) seller. The buyer company s due diligence revealed that a prior restructuring transaction might be taxable under complex consolidated return regulations. This was unexpected because the PE firm had received a legal opinion that it should be a tax-free transaction. However, that opinion was based on assumptions about events that ultimately did not occur. The PE firm refused to provide the company with full tax indemnity. The company had 10 days remaining in its exclusive period (including the Christmas holiday), and the PE firm was unwilling to extend the time period. A Tax Insurance policy was placed to insure the tax liability risk as a result of the restructuring not being treated as a tax-free transaction. The buyer company was the insured. The Tax Insurance policy had a $50 million limit, and a seven-year period. The one-time premium today would be $2.5 million. The Tax Insurance policy was bound within the 10 days remaining on the exclusive period, and the sale and purchase agreement (SPA) was executed. The deal closed several weeks later.

9 Sale of a Private Real Estate Investment Trust (REIT) In recent years, a popular investment strategy has been to hold real estate through a single purpose REIT. However, as the owners of such properties consider their exit, they now realize that buyers are discounting the purchase price if they buy the REIT entity rather than the property itself. In addition, the seller typically is required to provide representations and warranties and a multi-year indemnity regarding REIT qualification under relevant tax rules. This is particularly unattractive to PE sellers looking to return capital to investors soon after sale of a property. Aon has developed a risk transfer insurance product that will assume the risk of REIT disqualification during the seller s period of ownership. In addition, the product will allow the seller to conclude the transaction without survival of its representations and warranties relating to the tax treatment of the REIT as well as the business. This coverage can be implemented on a single-transaction or programmatic basis. Solar Investment Tax Credit (ITC) Fund A tech company sought to invest in a fund sponsored by a solar energy company that would, in turn, invest in a portfolio of residential and commercial projects. Because the investment was outside its core business, the tech company required protection that the projected tax benefits would be received and not lost due to a recapture event. Tax Insurance was used to assure the investor that the investment vehicle would be respected as a pass-through entity, that the solar facilities would indeed qualify for the credit and the tax basis would be respected, and that there would not be a tax loss due to recapture. The Tax Insurance policy has a limit equal to the amount of projected tax benefits and provides coverage through the end of the recapture period. Stapled Insurance Package R&W, Tax and Environmental Programs A U.S. PE firm was preparing to sell a $400 million manufacturing company through an auction process. The target was the last of 15 divestitures of a holding company as well as the last investment of a fund. The PE firm knew it would have to address the numerous hanging indemnities from past sales, its representations and warranties on the current transaction, the tax risk associated with its netoperating-loss carryforwards and the target s environmental issues. The PE firm wanted to affect the sale on an as is basis and have no surviving indemnities post closing. Before the auction began, Aon structured and obtained quotes for a package of Tax Insurance, Representations and Warranties (R&W) insurance, and environmental insurance in favor of the buyer. Bidders were told to work with Aon, and the PE firm made it known that it would provide no indemnities. The PE firm offered a purchase price reduction to cover the insurance cost. The insurance package was successfully implemented for the winning bidder and the seller was able to exit the investment without hanging liabilities from prior transactions and representations related to the current transaction. As an added benefit, the selling PE firm reported that the vetting of these risks by insurers made the buyer more comfortable and allowed for a streamlined due diligence process.

10 Testimonials Aon team while we re waiting for last Ts to be crossed on the merger agreement, I wanted to thank you for your excellent and tireless work and your leadership with the insurers. The [ transaction] we are about to sign most definitely would not have happened without this highly-bespoke insurance. Great job, greatly appreciated by both law firms and both clients M&A Partner at Major Law Firm We have been recommending the Aon Transaction Solutions team to our clients needing tax insurance for over 10 years. We have closed deals that simply would not have happened without tax insurance. The creativity, professionalism and technical abilities of Aon were critical to achieving the transfer of the tax risk to the insurers Tax Partner at Major NY Law Firm

11 To Learn More Aon professionals can provide your organization with the experience, tools and deep industry expertise required to maintain a competitive edge in today s markets. Contact the following representative to learn more about specialized solutions from Aon Transaction Solutions Practice. Aon s Tax Insurance Specialists Gary P. Blitz Senior Managing Director/ATS Co-Practice Leader gary.blitz@aon.com O: M: Jill Kerxton Managing Director jill.kerxton@aon.com O: M: Jessica Harger Vice President jessica.harger@aon.com O: M: Daniel Schoenberg Managing Director daniel.schoenberg@aon.com O: M: David McCann Director david.mccann@aon.co.uk O: +44 (0) M: +44 (0) Corey Lewis Assistant Vice President corey.lewis@aon.com O: M: Aon Transaction Solutions Leadership Michael Schoenbach Senior Managing Director/ATS Co-Practice Leader michael.schoenbach@aon.com O: M: Matthew Heinz Senior Managing Director/ATS Co-Practice Leader matthew.heinz@aon.com O: M: Gary P. Blitz Senior Managing Director/ATS Co-Practice Leader gary.blitz@aon.com O: M: Aon Client Promise Everything we do at Aon is focused on creating distinctive value for you based on insightful analysis, powerful execution and a deep understanding of your business and risk issues. Aon s Client Promise methodology is made up of a four-step process built around helping your business meet your goals and objectives. Our service platform is built around delivering the ten elements of our Client Promise to you. Together, they help ensure a solution designed for your unique requirements and business goals.

12 About Aon Aon plc (NYSE:AON) is a leading global provider of risk management, insurance brokerage and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 72,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative risk and people solutions. For further information on our capabilities and to learn how we empower results for clients, please visit: Aon plc All rights reserved. The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. GDM18804 Risk. Reinsurance. Human Resources.