The current tax environment in South Africa is complex, leaving taxpayers feeling uncertain about their existing tax position and future plans. The South African Revenue Authorities (SARS) have an increased focus on tax collections and are especially focusing on Ultra High Net Worth Individuals, Trusts and Corporates.
The uncertainty in the current economic environment and the focus on collection of tax are forcing taxpayers to review how their affairs are structured and to put more effort into planning their affairs.
If SARS attack certain transactions the resultant consequences, if they are successful, could lead to serious financial implications for taxpayers.
What is Tax Risk Insurance?
When taxpayers buy tax insurance, they are essentially buying protection against known financial risks, but it is becoming increasingly common to insure against future unknown tax risks. Taxpayers may face various tax risks and each one requires a different approach, as a result there is no one size fits all solution for tax insurance.
Generally, the risk being insured needs a tax opinion comfort level of at least “more likely than not” which is the conclusion a registered tax practitioner would reach if he or she is satisfied with the facts and interpretation of such facts.
The policy period is an important term in tax insurance as this is the period the policy is in effect and during which period claims are covered. Policies typically cover a seven-year period which is, in a South African context, more than enough to address the three-year statute of limitations with specific reference to the prescription of assessments.
Cover typically includes actual tax liability, interest, penalties, legal cost, and tax gross ups.
Tax insurance is most often used in merger and acquisition (M&A) transactions, but it is also being used for tax migrations meaning changing a taxpayers tax jurisdiction, group reorganisations, transfer pricing, restructuring of family businesses and estate planning.
Insurers are also willing to consider transactions that have already been implemented.
Why is Tax Insurance Beneficial?
In the South African environment there are huge pressures on the fiscus to collect income, as indicated in the latest mid-term budget speech. One area is through collecting more tax. Unfortunately, the percentage of the population from whom SARS are able to collect tax is ever decreasing. Taxpayers are also putting more effort into planning their affairs to reduce their tax exposure.
Taxpayers are well within their rights to plan their affairs as long it is within the ambit of the relevant laws. The concern however is that one does not know how certain transactions will be interpreted in the future by the courts and that creates uncertainty.
Tax insurance provides protection against exposure to future SARS challenges and provides certainty on the financial impact a tax audit might have on a taxpayer’s financial position.
It normally also covers the “pay now argue later” dilemma a taxpayer faces once in the midst of a tax audit or dispute.
Having tax insurance in place allows a taxpayer to sleep at night!
How do I Obtain Tax Insurance?
The first step to obtaining tax insurance is to connect with a reputable broker who will assist with collecting all the relevant information for submission to underwriters. The information typically includes the context of the transaction, detailed solution, implementation plan as well as an opinion issued by a registered tax practitioner.
Once the underwriters agree to proceed, the specific terms of the policy and premium are negotiated.
Premiums are based on the complexity of the transaction, quality of advice, quality and reputation of advisors and also the jurisdiction where the transaction is executed.
A wide range of tax positions are insurable, and taxpayers should seriously consider the possibility of tax insurance.
If you would like to pursue tax insurance or have any questions about the process, please contact Kemp Munnik at email@example.com.