The benefits of Advance Tax Payment in a high interest rate environment
BY STAFFAN BOS
What is Advance Tax Payment?
Tax insurance provides coverage for tax losses in the event of a dispute with a tax authority regarding a specific tax risk that has been insured. This coverage is typically activated upon a final decision being made by a court, indicating that the insurer expects the policyholder to contest any tax assessment that has been issued. Advance Tax Payment (ATP) is the term used to describe any payment that a taxpayer may need to make before they can officially challenge the assessment.
Where is it relevant?
ATP is especially useful in jurisdictions that require a (partial or full) prepayment of taxes if an appeal is made against a tax assessment. In that case, the insured party will not need to cover the costs of the payment, as the insurer will bear the cost.
ATP can also be helpful in jurisdictions that generally do not require a tax prepayment before an appeal can be made. In those jurisdictions, a prepayment could be beneficial to avoid incurring high interest costs while the tax risk is appealed throughout the courts. In practice, interest rates of up to 15% p.a. have been observed depending on the jurisdiction, indicating that interest costs could accumulate significantly over the course of court proceedings, which often extend for several years.
Recent experience
In recent years, ATP has sometimes carried an additional premium, although, it is now offered as standard under most tax policies for no extra cost. As the tax insurance market matures and tax authorities look to increase tax revenue, more payments under ATP clauses are expected in the coming years. Some tax authorities are also becoming less willing to grant an extension of payment while a tax assessment is being appealed.
How ATP can protect insureds against temporary loss
ATP ensures that the insured's cash flow will not be affected and prevents interest from accruing on the tax assessment amount while this is being appealed. In a low interest rate environment, this might have been less relevant; however, with the recent global increase in interest rates, ATP could be very beneficial to a taxpayer.
By taking out a tax insurance policy that includes ATP, insureds can protect themselves not only against a final determination of a tax assessment but also against temporary costs during the appeal phase. Combined with defence costs, which are typically also covered under a tax insurance policy, this makes tax insurance a powerful tool for any taxpayer to mitigate their tax risks.
Under our tax insurance policy, Transact can provide for ATP, upon which a pay-out can be made after a first assessment is received from the competent tax authorities regarding the insured risk. ATP also includes the cost of providing security or a guarantee.
If you would like to know more about ATP or tax insurance in general, please connect with Staffan Bos or contact us by emailing trptaxsubmissions@transactriskpartners.com.