Managing Tax Risk Through Tax Insurance - …

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

2 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.

3 Protect Yourself Against and other participants in M&A and Unexpected Tax Liabilities financial transactions in the Today's tax structures and their legal, and internationally. With Tax Insurance , financial and business implications A Proven Approach organizations can are rapidly growing in both size and Tax Insurance is a product with a long Gain an alternative to a private complexity. Tax Insurance coverage is letter ruling from the IRS. and successful history. It has been designed to protect against the failure Address the small probability written by the Insurance markets for of a transaction or situation to qualify of catastrophic loss the Fortune 500, private equity and Allocate the economic risk for its intended tax treatment.

4 Similar middle market companies since the of a tax loss in effect to a private letter ruling, Tax early 1980s when Lloyd's of London Mitigate counterparty Insurance brings certainty to taxpayers credit risk in tax indemnity covered investors in lease transactions as to the treatment of their tax agreements against loss of projected tax benefits. Replace, reduce or enhance positions, including federal, escrow requirements state, local and/or foreign taxes. Since that time, a specialty Insurance E xtend the survival of (or market has been supported by add to) the amount of seller By providing assurance against the indemnity skilled Insurance intermediaries like unanticipated or ill-timed occurrence Avoid posting FIN 48 reserves Aon Transaction Solutions that help of a tax loss, Tax Insurance is an in specified cases companies manage tax risks of all effective and economic means of types, ranging from tax credits for protecting against an unpredictable renewable energy and low-income or catastrophic drain on cash flow housing to M&A-driven issues such as and earnings.

5 Aon clients that have whether a tax-free reorganization will relied upon Tax Insurance include be respected to risk facing a company private equity sponsors and portfolio absent a transaction, such as an internal companies, Fortune 500 industrial and reorganization or transfer pricing. financial services companies M&A and Other Transactions Aon experts provide a range of traditional protections via Insurance . Tax close a deal. This frequently arises with solutions to help address transactional Insurance and transactional products a disproportionately large tax exposure risk in M&A and financing transactions. also provide a mechanism for sellers to that may not be resolved for many years.

6 Tax Insurance and other transactional insure their contingent liabilities. In addition, Aon's Tax Insurance team Insurance products are an effective tool and our underwriters specializing in to efficiently structure a transaction For M&A in particular, the real benefit Tax Insurance can often bring added that allows a seller to provide a smaller of a Tax Insurance policy is that it value with respect to pricing, terms and escrow or less indemnification. At the provides certainty and often allows a encouragement for the deal to move same time, the buyer still receives the buyer and seller to move past a difficult forward in a timely fashion.

7 Negotiation over an uncertain issue and Examples of Insured risks Tax Opinion Insurance Tax Credit Insurance M&A. Tax-Free Spin Offs Tax-Free Reorganizations/. Restructuring Historic Tax Credit Tax Credit Renewable Energy REITS Qualification Tax ITC/PTC. S Corp Qualification/ Lease 338 (h)(10) elections Structure LIHTC. Deferred Compensation Partnership MNTC. Structure 409A Recapture Qualified Transfer Pricing Basis State Tax Credits Capital vs Ordinary NOL Carryforwards Key Features of Tax Insurance Policies Policies identify covered Straightforward policy (although such opinions transaction and intended wording is provided with can make the underwriting tax treatment.)

8 Minimal exclusions (meaning process more efficient). Typical policy periods a misrepresentation by Insurance premiums are are up to six years on a the Insured). The policy tax deductible. noncancellable basis. Where wording is manuscripted Insurers require specified circumstances require, longer (or customized) for each rights to participate periods may be available. transaction. in material decisions Policies typically cover tax, An aggregate limit of liability surrounding a contest interest, penalties and a gross is specified. with a tax authority. up for tax on the Insurance The underwriting process is Any settlement with the policy proceeds.

9 Fast and can accommodate taxing authority must be accelerated deal timelines. approved in advance by Tax opinions are not required the insurers. 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.

10 Tax Insurance helps manage these risks and was identified by the IRS in Rev. Proc. 2014-12 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. Tax Insurance has been used to protect tax-equity investors in the following areas that provide federal tax credits: Renewable Energy Historic Rehabilitation Affordable Housing Solar, Wind and Biomass Tax Credit Insurance The federal government and a number The federal tax code provides for a The federal tax code provides a 10-year of states provide an investment tax credit against tax for 20 percent of stream of tax credits for building credit for a percentage of the cost of qualified expenditures of specified affordable housing and renting it to various types of renewable energy historic structures in the year a qualified tenants.