ECIROA
ECIROA’s Guenter Droese suggests that without the OECD providing industry support, their own target goals cannot be achieved
What is the overall aim of the OECD’s BEPS? And why are captives under greater scrutiny?
The main target of the Organization for Economic Co-operation and Development’s (OECD) base erosion and profit shifting (BEPS) has been to avoid or prohibit “to artificially separate the allocation of multinational enterprises taxable profits from jurisdictions in which these profits arise and, to secure the profits will be taxed in the jurisdiction the multinational enterprises operate because BEPS distorts competition, investment decisions and creates an issue of fairness” and to achieve “an improved coherence of tax rules at the international level and the reinforcement of substance requirements which shall enhance transparency and certainty to ensure a level playing field in the 123 member countries”.
OECD started with the BEPS papers based on the request of the G20 and complaints have been raised against multinationals which allegedly are offending taxation rules shifting profits to low/zero tax rates. Captives are just some legal entities which are part of these allegations being subsidiaries of multinationals.
What are the main concerns around BEPS and captives?
When the OECD first introduced BEPS captive owners initially recognised that the business plans and structures of captives as part of the risk management concept of a big corporation or a multinational in its complexity and in the details had not been understood.
Three main concerns which are also substantial for some captives include Controlled Foreign Company rules, the permanent establishment (PE) status and the Transfer Pricing Principle.
Some local taxmen assessed more diligently as in the past whether the local tax provisions are respected. This led to some discussions but most of the captives could explain their business model and their functions satisfying the concerns raised. Our impression is that the initial excitement has been replaced by a down-to-earth attitude of the captive owners. OECD’s recommendations have not been implemented in most of the countries. Some governments realise that the request to create a level playing field bears the danger that with the recommended changes they may reduce their own tax revenue.
Has the OECD worked with the captive industry to address these challenges? If not, what collaboration would you like to see?
Yes, captives are a risk management tool to help the pre financing of potential future losses and claims but not to collect profits to be untaxed — we have explained this function very precisely.
We also discussed with OECD about the unfounded allegations versus captives, which have been primarily related to Governance and Substance and the Transfer Pricing Principle.
Based on the laws, rules and provisions of Solvency II, local tax and the international accounting principles captives are following these compliance requirements as much as possible in their jurisdiction.
Nevertheless, we tried to convince OECD senior managers that the BEPS papers will not succeed as long as we cannot allocate our premium to countries where we have insurance coverage for local risks but due to restrictions of local insurance regulation the assignment of premium is not allowed. Apparently, they understood the facts but didn´t react with any activity or further considerations.
What work has the European Captive Insurance and Reinsurance Owners Association (ECIROA) done with the OECD in relation to BEPS and captives?
We wanted to work with the OECD rather than act as an opponent of their ideas and requests in principle, because the compliance requirements we have to fulfil already are sufficient to achieve the targets of BEPS with the caveat that international insurance programmes (IIPs) suffer under the regulatory ignorance to improve the current situation.
We have asked the OECD to support the efforts of ECIROA and most of the big insurance carriers to convince the IAIS and local regulators (also EIOPA) that IIPs can be placed and performed in a compliant structure only when the cross-border allocation of premium is not prohibited. Hence, the regulatory institutions are under pressure because they hold insured corporations and their insurers back to fulfil the appropriate compliance requirements.
Do you think the BEPS transfer pricing guidance released in 2020 fulfilled its purpose?
Regarding the taxation of allegedly shifted profits the transfer pricing element is probably the most urgent and target driven duty to implement. But nothing happened to date with regard to insurance premiums..
The arm’s length principle applied in the determination of a “fair and correct” premium is part of the transfer pricing disputes; no manager of a multinational`s subsidiary or branch will accept excessive prices.
OECD has not provided any support to help the insurance industry, but they should know that without a transparent regulation of cross-border insurance activities and premium allocation in this IIP business, their own targets cannot be achieved.
It’s correct, there are some double-taxation issues, existing facts and also newly introduced. But this has not been an issue within the BEPS paper.
What should captive owners be doing to ensure they are compliant?
Captives are following the existing regulatory requirements, the local and generally agreed accounting principles (GAAPs) and the local tax laws. What else can they do?
The captive’s business and performance is following the structure of the IIP which has been negotiated between the insured and the insurers.
As mentioned above an allocation of premium to all insured locations/countries is very often not possible.
Is there any planned work scheduled around this or has the pandemic caused delays?
There is no additional work scheduled around BEPS. The need for change as mentioned above is a permanent challenge for the stakeholders.
We are in contact with the various institutions including the International Association of Insurance Supervisors, OECD, the European Insurance and Occupational Pensions Authority, local supervisors and taxmen, to try and convince them with the necessary patience. But they have to listen, understand the problem and then to decide how to proceed.
ECIROA has sent IAIS a proposal for an additional Core Insurance Principle (CIP) how to remedy the cross-border insurance, premium allocation and claims payment-problem. This could be a perfect basis for future considerations.
But again, regulators are silo-minded and take care only of the supervision of insurers.
They are not taking care of the relation between the insured corporations/individuals and their insurers and are not interested in an interdisciplinary approach to optimise the economic situation of all stakeholders.
