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James Wilson explores Tax Insurance in Bloomberg Tax and Bloomberg Law

Head of M&A and Transactional Risks, James Wilson, examines how Tax Insurance can help dealmakers navigate the current global economic uncertainty and mitigate transfer pricing risk.

James’ article was published in Bloomberg Tax and Bloomberg Law, 17 April 2025.

Geo-political turbulence continues to rattle the M&A market both in the UK and internationally. This is evidenced by the recent report from the Office of National Statistics which highlighted a notable slump in UK M&A activity towards the end of 2024. Many analysts ascribe this decline to factors such as the impact of Rachel Reeves’ Autumn Budget, or recent geo-political upheavals across the globe. Others cite investor concerns about the possibility of trade with the US being impacted by the Trump administration’s penchant for imposing new tariffs.

Whatever the reason, it is clear that dealmakers and their advisors have understandably become more risk averse amid such economic, regulatory and political uncertainty. Yet, perhaps the biggest uncertainty they face is that most notorious one of two certainties in life: tax.

Fortunately, many categories of tax risk relevant to M&A can now be significantly mitigated by good tax planning, allied with comprehensive Tax insurance. The continued evolution of the Transactional Risk Insurance market means that increasing categories of tax risk can be insured, thereby easing investor concerns and facilitating M&A transactions.

A key area which policies can cover is Transfer Pricing. One of the most complex and contentious areas of tax, this is often a key factor when it comes to assessing and structuring proposed transactions between related entities.

The UK Labour government’s corporation tax roadmap aims to provide certainty for investors when it comes to corporation tax, and it does promise to keep the rate at 25% for the lifetime of the current government. Yet, while the headline corporation tax rate may be predictable, investors are concerned about the potential changes to the UK’s rules relating to transfer pricing. This could have serious tax implications for transactions.

Of course, in a multinational group, changes to the tax rules in other jurisdictions can also have a significant impact on a deal’s viability too, so the international consensus also matters.

In this regard, the UK government’s corporation tax roadmap suggests that it remains committed to the OECD Pillar 1 and Pillar 2 solutions. However, the UK government has indicated that it will shortly consult on potential rule changes which could include reducing existing thresholds for medium sized businesses so that they fall within under the existing transfer pricing rules. It may also look at new measures regarding the sharing of intellectual property across group companies, which can be a key factor in international corporate tax structures. Potential new reporting requirements for multinationals involved in cross-border group transactions have also been flagged.

Transfer Pricing regulations essentially require that intra-group transactions be conducted at arm’s length. In simple terms, they should mirror the sort of conditions that would apply between independent parties. These rules are designed to prevent artificial profit shifting and tax base erosion, by ensuring that profits are taxed where economic activities and value creation take place.

Given the complexity of transfer pricing arrangements, it had often been difficult to secure Transactional Risk Insurance relating to Transfer Pricing. This risk was typically excluded by under many Warranty & Indemnity (W&I) insurance policies, which meant that a separate specific Tax insurance policy was the only feasible insurance solution if the M&A parties were concerned about an identified transfer pricing risk.

The willingness of insurers to cover Transfer Pricing risks more generally was traditionally very limited. However, insurers became more willing to offer this cover as regards intercompany debt or shareholder loans – particularly as regards interest rate risk. Such cover has become the primary focus of Tax Insurance for Transfer Pricing, and underwriters are now becoming more comfortable insuring these risks.

Tax insurance has now broadened further still, to include transfer pricing risks beyond intercompany debt. This expansion in cover reflects the increasingly complex nature of global business operations and the increased capabilities of insurance brokers and underwriters to address and mitigate these exposures. Underwriters’ comfort levels with insuring such risks are subject to there being clear documentation available, and robust planning and advice around the specific scenario.

Outside of intercompany debt cover, the market is now seeing Tax insurance being used to cover Transfer Pricing risks, including intellectual property allocations, intercompany services and tangible goods transactions.

For both debt-related and non-debt-related risks, a robust TP benchmarking study is crucial. These studies provide the necessary evidence that the prices or interest rates applied are at arm’s length, which gives underwriters the ability to insure such risks.

Each risk is individually assessed, depending on the specific facts of a particular matter. Another factor that gives underwriters the ability to offer more comprehensive cover is where similar arrangements in previous tax years have been audited without challenge.

The insurability of such risks heavily depends on the jurisdiction involved. Different countries have different regulations and enforcement practices. This of course influences the risk assessment and scope of cover that can be obtained from underwriters. Therefore, when designing a tax structure, it is wise to utilise jurisdictions whose policies provide greater certainty.

When used efficiently and effectively, Tax insurance can provide a real safety net for companies, allowing them to better manage the financial risks associated with M&A, overcome uncertainty and facilitate deals which may not have happened otherwise. It can therefore be an essential risk mitigation strategy for a group facing the sort of complex Transfer Pricing challenges which can often arise during transactions. As tax authorities in the UK and overseas increase their scrutiny of Transfer Pricing, dealmakers and their advisors should adopt more robust risk management strategies.

When allied to careful and expert tax advice, Tax insurance offers a pragmatic risk management solution across a wide range of Transfer Pricing and other tax related exposures. With the Tax Insurance market now becoming ever more sophisticated and innovative, such products can help dealmakers get transactions over the line, even in a time of increased uncertainty.