The Organisation for Economic Co?operation (OECD) intends to publish a second ‘consensus’ discussion draft on the transfer pricing aspects of financial transactions in late 2018 or early 2019, with the aim of reaching an agreement on the final guidance in 2019.
The first ‘non-consensus’ discussion draft was published by the OECD Working Party Number 6 in July and dealt with follow-up work in relation to Actions 8 to 10 of the base erosion and profit shifting (BEPS), which deals with the relationship between transfer pricing and value creation.
The purpose of the first discussion paper was to gather insights from the industry to aid the OECD ahead of publishing the second discussion draft.
More than 1000 pages of public comments on captives were received on the paper by the OECD’s 7 September deadline.
Section E of the paper was focused specifically on captive insurance, which according to Fabrice Frere of Aon, was the first time an OECD paper had featured a section designated specifically to captives.
Speaking in the keynote session at the 2018 European Captive Forum, Frese and Günter Dröse, chairman at ECIROA, analysed slides composed by Tomas Balco, head of unity of the tax treaty, transfer pricing and financial transactions division at the OECD, who was unable to deliver the keynote as scheduled.
Frese noted that the biggest area of concern for OECD members is “the circumstances in which captive insurance transactions qualify as insurance transactions”.
He added: “Apparently they’re very nervous about the fact that we might be doing non-genuine insurance transactions, which seems a little strange in a heavily regulated environment.”
Working Party Number 6 will meet again in November to continue to work with a view to resolving the remaining issues and tensions dividing countries, ahead of publishing the ‘consensus’ discussion draft in late 2018 or early 2019.
The OECD is targeting reaching an agreement on final guidance for the transfer pricing aspects of financial transactions in late 2019.
Dröse said he hoped the OECD would take the public comments on board and revise their view of captives.
He stated: “Our wish is to reduce the OECD’s position on captives so that we are no longer viewed as the bad guys.”
“So that the OECD understand that in the captive industry, as in all industries, there might be some black sheep but that they should try and identify those and not attack all captives.”
Frere suggested that while a completely consistent approach by all tax authorities would never be reached, the OECD recommendations can be helpful for the captive industry.
He commented: “The ultimate tax decision will be with the local tax authorities but that is more than 100 administrations.”
“The whole purpose of the OECD is really to get to a level of understanding about tax and avoid uncertainty. They publish recommendations that are consistent and applicable across all those administrations. “
“We will never get to a fully aligned, 100 percent consistent, approach by all tax authorities but at least we can reduce tax uncertainty in the industry, we can have some consistency, and we can use that going forward in conversations with the authorities.”
Frere added: “It is important to keep in mind that the legislation will be local, many administrations will not change their laws unless it fully contradicts the OECD. Local authorities will always have their own view on it, but at least we can refer to the OECD recommendations to try and defend our case.”
“So some of the biased views we face from tax administrations can be fought against using the OECD recommendations.”