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FERMA publishes guidelines for BEPS on captive (re)insurance arrangements

On 20 June, FERMA has released proposed guidelines for captive (re)insurance arrangements in order to ensure a consistent implementation of the OECD recommendations on Base Erosion and Profit Shifting (BEPS).

Click above to read the document

 

The guidelines are meant to support national administrations when transposing BEPS actions into their national laws. They cover three areas which raised certain questions of interpretation by the OECD members during the implementation stage of the BEPS actions published in 2015: commercial rationale, substance and governance, and transfer pricing – premium setting process.

Jo Willaert, President of FERMA

FERMA’s aim in publishing this information report is to allow OECD members to assess, in a consistent manner, the compliance of captive (re)insurance arrangements with the BEPS recommendations. The report draws on contributions from all its 22 member associations. It explains the concept of captive (re)insurance companies, and for the first time, presents compiled data on premiums, profitability and taxation levels from a sample of 462 captives owned by European resident multinational companies.

The President of FERMA Jo Willaert says, The objective of such guidelines is mainly to avoid creating a patchwork of diverging national legislations inspired by BEPS. Captives serve an important Enterprise Risk Management role with true business purposes for European businesses and other organisations. Although captives are only a very small portion of BEPS, FERMA believes that national authorities should be guided in how to assess captive arrangements according to BEPS recommendations.

Carl Leeman - IFRIMA President

Carl Leeman, FERMA Board member and leader of the captive project group

 “Our document demonstrates that the main financial ratios of the captive insurance industry are in line with the traditional insurance market,” Carl Leeman, leader of the captive project group and a FERMA Board member, stresses. “The paper, enriched and approved by our 22 national associations, represents a strong consensus within the European risk management community on how captives are supporting the operations of their parent organisations.

This report is the first of its type. Although its data comes from European companies, it has global application because the BEPS recommendations are being adopted by many jurisdictions around the world. FERMA, therefore, presented the report to the International Federation of Insurance and Risk Management Associations (IFRIMA).

FERMA also discussed the paper in early June with the tax department of the OECD in the context of the upcoming Public Discussion Draft on Financial Transactions and Transfer Pricing expected this summer.

Press contacts

Typhaine Beaupérin, FERMA CEO: typhaine.beauperin@ferma.eu, tel: +32 (2) 761 94 31

Lee Coppack, press contact: lee@coppack.co.uk, tel: +44 208 318 0330/ +44 7843 089904


Stating the Value of Captives

Captive insurance companies, especially in offshore domiciles, are under scrutiny from international tax authorities. As the financial or tax aspects of captives are increasingly likely to be challenged, risk managers will need to be able to demonstrate the added value of owning a captive to their senior management.

Since the publication of the OECD recommendations on Base Erosion and Profit Shifting (BEPS) in October 2015, more than 100 countries and jurisdictions have been collaborating to implement the 15 BEPS actions. The guiding principle of the BEPS initiative is to ensure “that profits are taxed where economic activities generating the profits are performed and where value is created”.

For risk managers, captive insurance is not a tax issue but an efficient risk management tool, especially for large corporations,” says FERMA President Jo Willaert.

Focus on captives is also coming from new European Union initiatives. In January 2016, the European Commission released an Anti-Tax Avoidance Package, now being discussed by the Council. A Public Tax Transparency proposal followed on 12 April 2016, extending country-by-county reporting to all large corporations operating in the EU.

Figures in context

Country-by-country financial and tax transparency are raising concerns for the captive industry. If made public, country-by-country financial and tax disclosure would give access to a large amount of highly technical information. A meaningful reading and interpretation of this information require a detailed understanding of the value chain in a group; many factors contribute to the creation of value and income in a multinational.

Tax authorities are competent to perform this analysis because of their expertise and training, but the same does not necessarily apply to members of the public. Risks of misunderstanding and misinterpretation, therefore, will be significant, forcing organisations to defend and justify their financial structures not only to tax authorities, but to less informed third parties.

With nearly 7,000 captives worldwide, the risk management community is well aware of the reasons and benefits of captive insurance, which is used by non-profits and public organisations as well as corporations,” says Jo Willaert. “These are light structures which perform a genuine (re)insurance activity. They help us to maintain affordable and wide risk coverage, access to reinsurance markets and greater risk insight.