Multinational companies with large captives need to be prepared to demonstrate their alignment to base erosion and profit shifting (BEPS) principles or face potential reputational damage and financial penalties, according to Nick Gale of Marsh Captive Solutions.
The UK implemented the diverted profits tax regulation to incorporate many of the BEPS recommendations into local rules in 2015. Other countries are set to adopt similar changes.
Gale has urged multinational companies to act now by documenting the financial and non-financial benefits of their captives.
They also need to show how their captives add value to local entities and the group, and document why the captive was established in its current domicile.
Captive owners must check whether they are using the most appropriate transfer pricing methodology and prepare an analysis to support captive premium.
Gale said: “In addition to the above, you can consider seeking risk expertise in order to perform a ‘health check’ on your captive, in regards to the recent changes.”
The Organisation for Economic Co-operation and Development’s (OCED) proposed changes to international laws for the BEPS project aim to tackle aggressive tax planning, which could affect the way captives approach tax and transparency.
BEPS refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low- or no-tax locations.
The OECD has specifically named captives as a potential vehicle for tax avoidance, meaning that they are likely to be subject to increased scrutiny.