Willis Towers Watson
The OECD BEPS initiative was not developed specifically for captives, but they are a target of interest. Adrien Collovray of Willis Towers Watson explains that while captives remain under the OECD’s spotlight, BEPS could be positive in the long term
Can you give a brief description of the Organisation for Economic Co-operation and Development (OECD) base erosion and profit shifting (BEPS) initiative?
The OECD BEPS initiative (in conjunction with the G20) has in excess of 80 signatories and parties (87 at 12 February 2019) to the multilateral convention to implement tax treaty related measures to prevent BEPS; where BEPS relate to the practice of international profit shifting from higher tax to lower tax jurisdictions.
Captive insurance companies are specifically referenced by the OECD as an instrument through which profit shifting could be achieved. For this reason captives are a distinct area of focus and as such it is incumbent upon captive owners to prepare and ensure that they have a comprehensive response to BEPS scrutiny.
What is its impact on the global captive market?
While not developed specifically for the captives, they have been directly referenced and are a target of interest. Initially this has created hype regarding the legitimate utilisation of captives. Those of us in the industry know that the vast majority of captives today are not created for tax reasons, with corporations benefiting from the control and flexibility of a regulated insurance vehicle over a commercially driven insurance market, or unregulated balance sheet retentions. It is our duty as captive professionals and captive owners to demonstrate the non-tax value and controls a captive provides. This uncertainty has led to some concern regarding new formations. Increased interest and formation activity for new captives demonstrate that the dust is settling regarding the expectations on our industry. Nevertheless, it is imperative that we remain actively involved in developments as the OECD seeks to refine what their initiative means in practice.
Should it be viewed as negative or positive by the captive market?
In the long term, I believe this could be positive for our industry, from the perspective of public perception and formalisation of processes and procedures. In the short term however, it creates a number of areas for concern. Not least is the opportunity for persons and institutions with limited knowledge of our industry to influence regulatory frameworks to the detriment of the real non-tax value which captive structures provide. As an Industry we need to assume responsibility to ensure we have an active place at the discussion table and are able to clearly articulate the captive value proposition and the wide-spread detriment which could be caused through misguided control mechanisms.
What is the current status of the OECD’s BEPS initiative?
The OECD and revenue authorities are very much in a learning and development phase. Expert advisors, such as Willis Towers Watson, have been monitoring developments and providing focused support for reviewing and evidencing compliance. Captive parent companies should see this as an opportunity to assess and document the value of their captive.
Have there been any recent developments?
The most recent paper is the 3 July to 7 September 2018 public discussion draft–BEPS Actions 8 to 10–financial transactions. This discussion paper primarily targets, from a captive perspective, transfer pricing of premiums. This paper appears to branch into defining what may constitute insurance for a captive. I believe we should be concerned by the potential for persons with limited knowledge of our industry, seeking to change or restrict it to suit political headlines rather than substance based motivation.
What developments should we expect to see moving forward?
We can expect further consultation and refinement. Revenue authority interest will increase, as they learn from audits of larger captives and seek to apply this increased knowledge to small companies. In this regard; preparation is key. The lack of structured supporting documentation, regardless of the true value drivers intention or methodology, will lead to increased scrutiny and additional defense expense.
Do captive insurance companies need to stay aware of these developments?
Yes, it’s imperative that captives not only stay aware but review and document processes and procedures with a particular focus on substance (why is the captive located where it is and what substance does the company have in that location?), economic rationale (at an arm’s length basis, why would the parent buy from the captive and why would the captive assume risk from the parent?), finally, transfer pricing (simplistically, justifying the pricing in relation to the risks retained and reasonable costs).
There has been a lot of concern from within the industry about the OECD’s stance on captives, do you think this is something we might see a change in soon?
I expect the OECD will continue to keep captives under the spotlight. As an industry we need to be prepared defend the non-tax value and long term functionality of captives.
