Heightened regulatory scrutiny around the world has made transfer pricing a primary concern for multinational enterprises (MNEs). The Organisation for Economic Co-operation and Development’s Pillar Two global minimum tax and other global tax reform initiatives are highly complex and becoming more so, which means that MNEs are challenged to manage and defend their transfer pricing arrangements with more rigor than ever. Responding to these changes requires sophisticated strategies to navigate the evolving risks in the tax positions that arise from mergers and acquisitions (M&As) and even day-to-day operations. A new study by Aon highlights this urgency, showing that seventy-two percent of surveyed senior executives view tax risk as more acute now than in previous years.1
Tax insurance has emerged as a valuable tool in this arena, offering MNEs protection against potential financial impacts stemming from transfer pricing disputes and unexpected tax liabilities. This article explores the role of tax insurance in managing and mitigating transfer pricing risk and outlines the trends and predictions that will shape risk management practices in the years to come.
Transfer Pricing: An Ongoing Tax Challenge
International tax planning and transfer pricing remains a critical focus for tax authorities worldwide. According to Aon’s survey of global corporate development teams and private equity firms, cross-border transactions in particular pose unique challenges for dealmakers who must navigate international tax treaties and withholding tax considerations. This process only gains complexity when multiple tax jurisdictions and regulatory frameworks are involved.
Nearly half of buy-side respondents (forty-four percent) cited withholding tax implications and international tax treaties as the single toughest hurdle they currently face, and a further twenty-four percent viewed them as the second biggest. Within the United States specifically, these concerns are also expected to grow due to the anticipated addition of Internal Revenue Service resources for transfer pricing audits and enforcement.
Standard risk management approaches—such as obtaining tax opinions or seeking rulings from tax authorities—are no longer sufficient for many businesses. Increasingly, businesses are now considering more proactive options like tax insurance to mitigate the financial impact of transfer pricing disputes and to safeguard compliance.
Current Threats to Effective Transfer Pricing Risk Management
To safeguard compliance strategies and optimize resources effectively, it’s essential to understand the various factors impacting transfer pricing risks. Among these factors, three primary threats complicate transfer pricing risk management: 1) limited availability and long processing times for advance pricing agreements (APAs), 2) the OECD’s Pillar Two global minimum tax, and 3) increased IRS funding for US enforcement. Each of these factors heightens the risk for MNEs, affecting how businesses approach transfer pricing risks and manage related costs.
Availability of APAs
Historically, managing transfer pricing risk involved setting robust transfer pricing policies, preparing detailed documentation, and, when appropriate, applying for APAs or rulings from tax authorities. When disputes arose, companies had a range of options: standard objections and appeals, negotiated settlements, arbitration, and the mutual agreement procedure (MAP).2
APAs—which allow taxpayers and tax authorities to agree beforehand on terms for intercompany transactions over a set period—have long been a common method for managing transfer pricing risk. However, because APAs are based on a predefined set of facts, any significant changes to the taxpayer’s business model during the term could invalidate the agreement.
Although APAs provide critical certainty, they can be costly and time-consuming, especially when they involve multiple tax jurisdictions. Although the IRS aims to complete unilateral APAs within one year and bilateral and multilateral APAs within two or three years, the whole process is typically extended beyond those timeframes. In 2023, the average time to complete new and renewal APAs was about forty-two months (three years and six months). Although this period is down from 43.4 months in 2022, the significant commitment of time and resources means that APAs are not a viable solution for every business.3
Implementation of Pillar Two
The OECD’s Pillar Two global minimum tax has introduced a minimum corporate tax rate of fifteen percent that many countries worldwide began implementing in 2024. This new standard requires MNEs to pay additional taxes if their effective tax rate in any jurisdiction falls below the minimum. Key aspects of the Pillar Two rules include the income inclusion rule (IIR) and the qualified domestic minimum top-up tax (QDMTT). The IIR requires parent entities to pay tax on the income of low-taxed subsidiaries, and the QDMTT ensures that countries can collect tax on local profits before they are subject to the IIR by another jurisdiction.
As a result, transfer pricing will face greater scrutiny and compliance will become even more complex under these rules, with disputes over intercompany transactions and profit allocations expected to increase. Tax authorities in major economies such as the United States, Spain, Ireland, and Germany are already stepping up enforcement.
The newly imposed minimum tax stands to impact all large MNEs with consolidated group revenues exceeding €750 million. This trend is likely to have the biggest impact on corporates. Nearly two-fifths of corporate respondents (thirty-eight percent) in the Aon survey believe their investment strategies will be most affected by the implementation of Pillar Two and global minimum taxation over the next twelve to twenty-
four months.4
IRS Funding Boost
In the United States, the IRS has committed to more transfer pricing audits and is predicted to triple audit rates for large corporations by 2026 (discussed below). Political shifts could influence tax policy and additional future IRS enforcement funding, but the IRS’ commitment to robust enforcement in transfer pricing is expected to remain steady. This investment in transfer pricing enforcement includes the following:
- Enhanced enforcement capabilities. The agency has been allocated more resources to audit large MNEs and to challenge their transfer pricing positions;
- Investment in skilled personnel. With additional budget, the IRS has been able to bring in more tax professionals, economists, data analysts, and transfer pricing experts specializing in complex international tax issues; and
- Sophisticated analytical tools. The IRS now uses advanced software and data analysis tools that allow it to pinpoint irregularities in transfer pricing strategies with greater precision, enabling it to identify and analyze high-risk transactions and jurisdictions more efficiently.
This increased scrutiny means MNEs face a higher likelihood of transfer pricing challenges, particularly for cross-border transactions involving intellectual property, intangible assets, and other high-value transfers. The potential for these disputes to result in more frequent tax adjustments, penalties, and interest is considerable, resulting in many businesses becoming increasingly risk-averse in the face of heightened enforcement.
Tax Insurance as a Risk Management Solution
Given these challenges, MNEs are justifiably concerned about safeguarding compliance while managing the costs of tax risk management. Tax insurance has become a valuable risk mitigation tool and a path forward for many companies, in that it offers MNEs flexibility and protection against unanticipated tax liabilities and other costs of disputes with tax authorities.
Originating in the 1980s, tax insurance has steadily risen in use, especially in M&As, as a buffer against legal complications, potential clawbacks of expected tax benefits, and significant future cash outlays. It protects policyholders involved in intricate tax planning who, despite taking reasonable positions, might still find themselves caught in the complexities of the US tax code. For many, an IRS dispute over a tax return position could result in tax assessments ranging from millions to hundreds of millions of dollars. With the right tax insurance policy in place, this risk can be mitigated and ring-fenced from business operations and deal negotiations.
In cross-border transactions, tax insurance covers a wide range of potential tax exposures. It can shield buyers from unforeseen pre-closing tax liabilities tied to positions taken by targets and sellers in M&A deals and is popular in sectors like renewable energy, where tax credits are leveraged to drive deal economics. As a financial planning tool, tax insurance can cover legal defense costs while also serving as a fallback for investments or tax positions that may take years for final resolution with the IRS by covering potential assessed amounts (such as taxes, interest, and penalties).
Advantages of Tax Insurance in Managing Transfer Pricing Risks
Tax insurance provides MNEs with several distinct advantages in managing transfer pricing risks in the following cases.
Transfer Uncertain Liabilities Away From the Company
The use of tax insurance enables companies to transfer an uncertain liability—specifically, the potential tax payable due to a future transfer pricing adjustment—from themselves to an insurer. This transfer is especially valuable in today’s increasingly scrutinized tax environment. By shifting this potential liability, businesses can better manage costs related to the risk, allowing for a more predictable financial forecast and better risk planning.
Coverage for Defense and Professional Fees
Even disputes that do not result in an adjustment or assessment from a tax authority require extensive documentation, expert consultations, and time-intensive legal procedures that result in substantial defense costs and legal or accounting fees. With tax insurance, companies gain a financial safety net for these fees, which can protect their bottom line and maintain a strong position in potential negotiations or legal proceedings.
Faster, Streamlined Underwriting Process
Unlike the lengthy processes associated with APAs and tax rulings, which can take years, tax insurance is structured to move along commercial timelines. This accelerated timeline allows companies to quickly and efficiently secure coverage, which is essential for meeting business and transaction milestones and managing financial risks without unnecessary delays.
Facilitating M&A Transactions With Reduced Escrow or Indemnity Needs
In an M&A context, transfer pricing insurance can play a critical role by replacing or reducing the need for an escrow or indemnity from a seller. By ring-fencing complex or large-scale transfer pricing exposures from deal negotiations, insurance policies can help both parties address exclusions in representations and warranties insurance as well as in warranty and indemnity policies. This approach ensures that potential tax liabilities do not become a sticking point in negotiations, allowing transactions to move forward more smoothly.
Coverage in Multiple Jurisdictions and Multiple Currencies
For MNEs operating in multiple regions, tax insurance can also cover potential challenges from tax authorities across various jurisdictions. This flexibility is critical, because different countries often have their own standards and interpretations of transfer pricing regulations. Additionally, transfer pricing insurance policies can be structured to accommodate multiple currencies, ensuring that companies have a cohesive, global solution for managing their tax risk.
Coverage for Positions Under Audit or Review
Finally, transfer pricing insurance can sometimes cover positions that are already under audit or review by tax authorities. Although insurers generally assess each case individually, coverage for previously scrutinized positions adds another layer of value for companies facing ongoing disputes. This feature can allow companies to protect themselves against potentially adverse outcomes even after an issue has come under tax authority scrutiny, providing a unique advantage not often available through other risk management tools.
Case Studies: Real-World Applications of Tax Insurance
Strategic partnerships with experienced advisors who understand the complexities of tax insurance can bring substantial benefits to your business. Look for a partner with technical expertise, extensive experience, and a global perspective. Ensure they are crafting solutions tailored to your unique needs, supporting your tax strategy, and aligning with your broader risk management goals.
Designing a balanced, comprehensive approach to risk management requires advisors who bring both technical insight and an understanding of historical tax trends to the table, helping your business navigate evolving complexities with confidence. The following case studies demonstrate how two companies leveraged tax insurance to achieve successful outcomes with the help of their advisors.
Transfer Pricing Across Multiple Jurisdictions
The company was exiting a global joint venture while retaining the US/Canadian operations of its business. As part of the transaction, the company’s existing transfer pricing model was terminated, and a new model for the use of certain intellectual property was implemented with the former partner.
Revising the intellectual property structure included terminating existing licensing agreements, entering new licensing agreements, and assigning certain intellectual property or “know-how” to which minimal value was attributed. The company also classified the new licensing arrangements as a “sale” of intangibles, allowing them to amortize their basis.
Due to the complexity and potential exposure, the company sought protection for the transfer pricing across multiple jurisdictions. They procured a $280 million tax insurance program with A-rated or better insurers, protecting against potential transfer pricing adjustments on the reorganization actions taken with respect to its intellectual property structure across multiple jurisdictions, as well as other tax risks associated with the transaction.
In the event of a successful tax authority challenge, the insurance would cover additional withholding and/or income taxes, plus interest and penalties, in US dollars, euros, or Canadian dollars, depending on the relevant jurisdiction.
Insurance After a Challenge from a Tax Authority
A standalone tax insurance policy was arranged for a company facing double taxation after a tax authority denied access to a MAP. The company, a multinational group with sales entities in various European jurisdictions remunerated as low-risk distributors, had structured its head office to receive all residual profits. One tax authority disagreed with this setup, asserting that the local subsidiary should be considered an entrepreneur, which would make the majority of the profits taxable locally instead of in the head office’s jurisdiction, with adjustments applied retroactively.
The tax rates in both affected locations were similar, so the company quickly requested access to MAP to avoid double taxation. However, the tax authority denied the request. In response, the company filed an injunctive claim, requesting the authorities change their stance and grant MAP access.
The company procured a standalone tax insurance policy that would protect against any double taxation arising from the MAP denial, covering additional tax costs and any associated interest charges.
Trends and Predictions: 2025 and Beyond
As 2025 approaches, three key trends are expected to shape the landscape of transfer pricing and tax insurance.
Trend No. 1: IRS Investment in Enforcement Will Continue
Transfer pricing has been a focal point for tax authorities globally, a focus that is expected to intensify. As the IRS ramps up resources dedicated to transfer pricing, it’s clear that this area will see heightened scrutiny over the next five to seven years. In fact, the IRS is predicted to nearly triple audit rates on large corporations with assets over $250 million to 22.6 percent in tax year 2026, up from 8.8 percent in tax year 2019. In addition, the IRS will increase audit rates nearly tenfold on large, complex partnerships with assets over $10 million, going from 0.1 percent in 2019 to 1 percent in tax year 2026.5
If the IRS becomes more litigious, it could dampen the appetite for risk among high-net-worth taxpayers, corporations, and family offices as they navigate tax planning. Down the line, this could carry serious repercussions for companies’ projections and stifle growth potential. The cost-benefit analysis of engaging in litigation versus purchasing tax insurance is straightforward—with tax insurance, the insured stands to pay only pennies on the dollar depending on the level of exposure, transferring risks to insurance companies and being empowered to conduct business without fear of litigation, disruptions to the balance sheet, or challenges to liquidity.
Trend No. 2: The Uncertain Impact of US Election
Changes in tax policy are a veritable certainty in the year or two following an election. To prepare for these impacts, businesses must strike a careful balance between adhering to existing strategies and making proactive efforts before possible shifts occur.
Companies should prepare for potential adjustments in areas like corporate tax rates, international tax reform, and IRS enforcement. Tax reform remains a policy of bipartisan focus, although each party takes a markedly different approach to issues such as the global intangible low-taxed income (GILTI) rate, foreign-derived intangible income (FDII), and base erosion and anti-abuse tax (BEAT) adjustments.
Volatility and uncertainty pervade the current market, making complex tax planning a daunting prospect, with severe consequences if done incorrectly. Although input from trusted lawyers and accountants traditionally has been viewed as the best avenue for navigating the tax code, tax insurance policies afford a high degree of protection and reliability when navigating new and untested tax legislation.
Trend No. 3: Navigating New International Tax Legislation
Transfer pricing is full of gray areas, and global legislative efforts to provide additional clarity and regulations to help multinational taxpayers navigate these complex rules are expected to continue. For example, in September 2023, the European Commission (EC) published two new legislative proposals: a directive titled “Business in Europe: Framework for Income Taxation (BEFIT)” and a directive to harmonize transfer pricing. Although these clarifications are welcome, especially in European, Middle Eastern, and African companies, applying these global guidelines within existing transfer pricing frameworks has created additional uncertainties. For businesses seeking a practical solution to protect themselves, tax insurance is proving to be an invaluable risk mitigation strategy.
Conclusion
With global enforcement ramping up, MNEs face unprecedented scrutiny and complexity in transfer pricing compliance. As discussed, limited availability and long processing times for APAs, the OECD’s Pillar Two global minimum tax, and increased IRS funding for enforcement in the United States all create heightened risk for MNEs in their approaches to transfer pricing and managing related costs. Tax insurance offers a proactive way to mitigate these risks, protecting businesses from unexpected tax liabilities, penalties, and interest. As 2025 approaches, partnering with a trusted advisor that brings deep expertise and global reach will be critical to navigating these challenges and preparing for changes in tax policy and enforcement.
Jessica Harger is a managing director in Aon’s M&A and transaction solutions group and co-leader of the North American tax insurance practice. Marc Nickel is a senior vice president in Aon’s M&A and transaction solutions group.
Endnotes
- Aon, Buy-Side Risk Insights, Mergermarket/Aon Survey, 2024.
- US tax treaties allow a taxpayer to request a MAP if the taxpayer believes that it is, or will be, subject to taxation inconsistent with the treaty and to prevent double taxation, though it often requires a lengthy timeline to resolve.
- Internal Revenue Service, Announcement 2024-16, Announcement and Report Concerning Advance Pricing Agreements, Table 7 (March 26, 2024), www.irs.gov/pub/irs-drop/a-24-16.pdf.
- Aon, Buy-Side Risk Insights, Mergermarket/Aon Survey, 2024.
- Internal Revenue Service, 2024 IRS Strategic Operating Plan, Annual Update, www.irs.gov/pub/irs-pdf/p3744b.pdf.
