Captive jurisdictions, both onshore and offshore, need to wake up to the inevitable disruption of Base Erosion and Profit Shifting (BEPS) scrutiny, according to Ian Kilpatrick, chairman of CICA’s BEPS committee.
Captive Review reported last week the Organisation for Economic Co-operation and Development (OECD) had published its final package on BEPS and it has since been signed off by the G20 group of finance ministers.
For Kilpatrick, too many jurisdictions are burying their head in the sand and not waking up to the impact it will have. He is particularly concerned captive insurance companies will be viewed by tax authorities as falling foul of substance requirements.
“The area I believe captives in offshore jurisdictions can be attacked is concerning the substance,” he told Captive Review. “It’s not because there isn’t a real reason for a captive to be formed, but what the authorities are going to say is there they are using an offshore domicile purely to divert profits.
“The captive owner does not locate its key decision makers – a chief risk officer or a director of risk and insurance management, for example – in the captive domicile and the authorities are going to expect to see that.”
Kilpatrick added that for the same reason captives in the likes of Vermont, South Carolina and Luxembourg could also come under scrutiny if no senior management professionals from the parent are located within the captive’s domicile.
“In all other aspects I believe captives are in a good place to meet BEPS requirements. The transfer pricing is solid, capitalization is suitable and regulated while independent actuaries are always involved.
“If multinational corporations want to keep their offshore captives they may need to seriously consider placing a key decision maker in their domicile-of-choice. The captive managers role could then become increasingly administrative.”
Despite CICA and the European Captive Insurance and Reinsurance Owners’ Association (ECIROA) writing to the OECD last year and presenting regularly on this issue, Kilpatrick believes in general the industry has been complacent in fronting up to the problems it could cause.
“BEPS is not simply an OECD project anymore,” Kilpatrick added. “It has been adopted by the G20 and Barack Obama, David Cameron, Angela Merkel and Francois Hollande are all signed up to it. Its consequences must be taken seriously by multinational corporations, the jurisdictions and the captive industry.”
Captive Review explores the potential impact of BEPS on captive owners and the industry in further detail in the upcoming November edition – sign up for a free trial here [http://captivereview.com/free-membership/]
Story by Richard Cutcher, Captive Review