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Businesses use tax insurance in the face of global unrest

To cover the TP risks of restructuring in the wake of COVID-19, the supply chain crisis, and the Russia-Ukraine war, businesses are implementing tax insurance programs.

Insurance, according to tax experts, is one strategy for managing the risks associated with the economic instability brought on by the Russia-Ukraine war, as well as the consequences of COVID-19 and the escalating supply chain issue.

Broker Kai Schmitz of the London-based insurance company BMS Group identifies a trend toward restructuring and refinancing.

As a result of the pandemic's effects and the new problems that 2022 brought, such Ukraine and inflation, he notes, "Company groups are still engaged in restructuring, re-financing, and/or winding-up their businesses."

Even before the Russian invasion of Ukraine, a number of nations were dealing with pandemic-related supply chain problems, which led to an increase in inflation. This is especially true for the energy industry.

Many businesses are rethinking their transfer pricing (TP) agreements as a result of the supply chain issue and the inflation rate increase. In certain circumstances, this entails reassessing their corporate and financial structures.

The effects of the public health crisis are still being felt, according to Brockwell Capital's head of tax, Richard Taylor-Whiteway.

States must generate revenue in the "post-COVID world," according to him, in order to pay for COVID-19 assistance and address current economic issues like the cost-of-living crisis. "This has led to an increase in tax authority activity and challenges as they seek to collect more tax."

As businesses have sought to address the novel tax risks brought on by the public health crisis, TP—once a tiny area of focus for the tax insurance sector—has emerged as a new growth sector. The so-called "new normal" now includes these threats.

The epidemic accelerated the global shift to remote work, and most businesses had to adjust. Due to these agreements, corporations are now exposed to new dangers, including corporate residency and permanent establishment (PE).

As a result, businesses began to adopt tax insurance products to minimize their exposure to TP risks associated with COVID, especially when it comes to company directors operating in different jurisdictions. Tax authorities may contend that this results in a PE or a shift in the company tax residency.

The issue will not go away. Taylor-Whiteway emphasizes that "taxpayers still face historic residence and permanent establishment risk from lockdown periods and also going forwards as a result of remote working."

Particularly when establishing the implementation of double tax treaties and withholding taxes, residence and PE risks remain crucial considerations. The general anti-abuse regulation (GAAR) is being used by tax authorities to pursue businesses for unpaid withholding tax.

"Tax authorities are clearly focusing on withholding taxes. For example, the Spanish tax authorities are using the GAAR to ensure withholding on cross-border cash flows," according to Taylor-Whiteway.

The concerns, however, go beyond personnel placement and remote work. Following a significant backlog of work created by the pandemic, tax administrations are operating more slowly. A revenue clearance is essential for companies buying out rivals in a jurisdiction.

A major issue, according to Ben Jones, co-head of tax at the London law firm Eversheds Sutherland, is the dearth of trustworthy clearing procedures in many nations.

"One regular catalyst for seeking insurance in the current market is the lack of a reliable revenue clearance procedure and in particular concerns around the time taken to obtain clearances," according to Jones.

"Arguably this is a hangover from pandemic staffing issues and the redeployment of revenue staff to COVID-19 initiatives," he claims.

Many taxpayers must wait a long time to receive revenue clearance. tJones continues, "this seems to be persisting still with no signs of improvement in response times, and tax insurance can fill the gap that the comfort of revenue clearance used to provide."

"Tax authority capacity is still stretched in some cases," adds Taylor-Whiteway, "and response times can be slow or processes protracted, for example where a ruling or clearance is being sought."

Businesses can insure against PE risks associated with remote employment, which may be a long-term problem, but on the other hand, taxpayers must deal with slower administrations. Tax insurance can assist businesses in handling these issues.

The Russia-Ukraine war, which the world has been dealing with since the beginning of 2022, has had a profound impact on the world economy. According to Jones, COVID-19 may not even come close to matching the effects of the Russia-Ukraine conflict and the global supply chain crises.

"Although it seems bizarre to say, with the benefit of hindsight the impact of the pandemic on many businesses appears to be relatively minor when compared to the more systemic and fundamental concerns raised by the current economic climate," adds Jones.

Themis Underwriting's head of tax, Paul Dickinson, concurs that there has not been a fundamental shift in TP risks as a result of the pandemic.

tAccording to Dickinson, "there has been a general expansion in risks being insured over the past three years as the product becomes better known and brokers extend their market reach."

"While transfer pricing models will clearly be impacted by supply chain changes post-COVID, changes in geographic footprint and where residual profits should lie, the vast majority of transfer pricing risks we see are on shareholder loans and the arm’s-length nature of the interest rate used," he says.

He says that unless they are backed by thorough third-party documentation that can be objectively examined, TP risks are very challenging to insure. Dickinson does anticipate a rise in the demand for insurance in TP, though.

The world is currently more uncertain than it has ever been. Governments have previously employed VAT reductions to combat rising prices, but when expenses climb further, other measures will certainly be implemented.

Energy corporations are subject to windfall taxes in various nations. One such country is the UK, where there is little indication of a coherent plan to address the cost-of-living crisis and the government is ready to change leadership.

"The challenge of finding a tax response to the competing issues of inflation, the cost-of-living crisis and impending recession, while attempting not to bankrupt the country, is a dilemma at another level entirely," according to Jones.

"We will doubtless see a raft of tax changes designed both to support the economy, alongside raising revenue where possible, and with such change comes uncertainty and risk. This is where tax risk insurance can be usefully deployed by taxpayers to mitigate some of this uncertainty," he says.

Businesses operate in an uncertain environment, but taxpayers have risk management options. In these trying times, tax insurance might be a beneficial tool for businesses.



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