OECD BEPS: defending the captive case
From: Captive International, April 24, 2017
Recommendations from the OECD have reversed the burden of proof on the legitimacy of captives, referring to them as potential vehicles for tax avoidance. Captive International speaks with Fabrice Frère, managing director at Aon Risk Solutions, about the onerous task of preparing for a potential BEPS audit which now falls upon captive owners.
In an attempt by the Organisation for Economic Co-operation and Development (OECD) to clamp down on tax avoidance strategies, captive insurance companies have found themselves under increased scrutiny from tax administrations worldwide.
This is a result of the OECD’s base erosion and profit shifting (BEPS) Action Plan, which over 100 countries and jurisdictions are currently collaborating on to implement the measures required to tackle such strategies.
BEPS specifically refers to the tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations, according to the OECD.
Such referrals to captives in OECD documents as potential tax avoidance vehicles – along with a subsequent surge in activity from tax administrations in a couple countries – has led to more questions being raised about companies’ captive arrangements, according to Fabrice Frère, managing director of Aon Risk Solutions.
The negative references to captives means that it is possible the local tax authorities within these countries and jurisdiction may also take an increasingly negative stance towards the captives, says Frère.
“We wanted to make a case that captives are not a tax avoidance tool,” says Frère. “You don’t set up a captive with the purpose of avoiding tax or minimising tax. There are some genuine risk management reasons for setting up a captive. And a real economic rationale behind a captive.”