The deal is insured. But do you know what tax risk you’re buying?
23 October 2026
Warranty and indemnity (W&I) insurance is becoming an increasingly familiar feature of M&A transactions, including those involving South African businesses. It can facilitate a cleaner exit for sellers and provide buyers with valuable protection. However, it does not remove the need to understand the target’s tax position.
The growth in transactional-risk insurance is measurable. Marsh reports that the number of unique transactions for which it arranged transactional-risk insurance increased by 15% in 2025 to 1,785, while the number of policies placed increased by 37% to 3,811. In Africa, enquiries more than doubled from 15 in 2024 to over 30 in 2025, with South Africa accounting for approximately 70% of the African W&I policies placed by Marsh. These are Marsh-specific rather than market-wide statistics, but they indicate the growing role of insurance in M&A transactions.
For deal teams, the practical question is how much tax work is needed to understand the material exposures before the price, transaction documents and insurance cover are agreed.
Tax compliance is not tax certainty
A South African target may have a “compliant” Tax Compliance Status yet still carry historic tax exposures. Returns may have been submitted and the amounts reflected in them paid, without them necessarily being accurate or complete in all respects, including for example, the tax treatment of ad hoc transactions, transfer pricing, VAT, or employees’ tax.
In practice, the difficulty often arises where a target is administratively compliant but cannot produce the agreements, reconciliations, calculations or advice supporting a historic position.
This matters given the scale of SARS’s compliance activity. In its 2025/26 Annual Report, SARS reported R319.2 billion secured through identifiable compliance activities, a 5% increase from the prior year. SARS also reported approximately 1.5 million verification and audit interventions and referred to its increasing use of internal and third-party data and analytics.
A clean compliance status is therefore a useful starting point- however, it does not establish that the target’s material tax positions are correct, adequately documented or capable of withstanding scrutiny.
The diligence should follow the risk
Not every transaction requires an extensive review of every tax type and period. The scope should reflect the target’s tax profile, the transaction structure and the matters capable of affecting value or deal protection.
For a South African operating company, this would ordinarily include corporate income tax, VAT and employees’ tax, together with its SARS compliance, audit and dispute history. Previous acquisitions, disposals, restructurings, unusual funding arrangements and significant once-off transactions may require closer examination.
The nature of the business also matters. A labour-intensive target, or one that involves many contractors, may present greater employees’ tax risk, while an asset-heavy business may require closer attention to capital allowances, recoupments and capital gains. Significant imports, exports or exempt supplies may justify a more detailed VAT and customs review.
Where the target forms part of an international group, the review may also need to cover intercompany funding and charges, transfer pricing, royalties, withholding taxes and historic group restructurings.
Material exposures do not arise only from aggressive tax planning. During 2025/26, SARS received 1,852 new Voluntary Disclosure Programme applications, entered into VDP agreements valued at R5.76 billion and reported R6.95 billion collected through the VDP process. VAT represented 56.6% of the value in SARS’s analysis by tax type. Ordinary-course matters such as VAT treatment, payroll practices and recurring deductions can therefore be just as important as complex restructurings.
Documentation matters
Tax due diligence should consider both the technical treatment and whether the target can support it.
This is particularly important for historic restructurings, VAT documentation, related-party arrangements, transfer pricing and significant deductions, allowances or tax attributes. A position that was supportable when implemented may become difficult to defend if the underlying agreements, calculations and contemporaneous evidence cannot be produced timeously.
Missing documentation may also limit the buyer’s ability to assess the exposure, make it harder for the insurer to underwrite the relevant warranty, and it may weaken the target’s position if SARS challenges the treatment.
An indemnity or insurance policy may allocate the financial consequences of an exposure. It cannot recreate a missing agreement, tax invoice, valuation or calculation.
Identifying an issue gives the buyer options
Leaving an issue unidentified does not guarantee that a subsequent loss will be covered by W&I cover. Policy exclusions, disclosures, the adequacy of the diligence and the wording of the tax warranties will still matter.
If an exposure is identified before the transaction is concluded, it may be:
- quantified and reflected in the price;
- remediated before completion;
- addressed through a specific indemnity, retention or escrow;
- taken into account in the transaction structure; or
- considered for separately underwritten tax liability insurance.
Finding an issue during diligence is not a failure of the process, but finding it after completion leaves the buyer with significantly fewer options.
Getting the balance right
There is no standard amount of tax due diligence that is sufficient for every insured transaction.
A straightforward South African business with a limited tax footprint and reliable records may justify a more focused review. A target with material tax attributes, cross-border arrangements, historic restructurings, open SARS matters or inadequate documentation may require a broader, more comprehensive approach.
If the buyer expects broad tax-warranty cover, the diligence must give the insurer sufficient information to underwrite it. An unduly narrow review may lead to further questions, additional work or exclusions for areas that were not adequately examined.
A concise review can be effective if it enables the buyer to understand the material exposures, evidence gaps, coverage limitations and residual risks before committing capital.
W&I insurance can be an important part of managing deal risk, but it is only as effective as the information on which the transaction and policy are based. Before relying on that protection, the buyer should understand what tax risk it is acquiring, what has been reviewed, what the policy covers and what remains with the buyer.
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