Clearly, the OECD has triggered a new round of world interest in captives, and not for the right reasons, as it might have resulted in tax authorities worldwide questioning the legitimacy of captives.
Mathew Latham, Head of Captive Programmes with XL Catlin clearly stressed the three major challenges for captives:
- Regulation and governance (Solvency 2 and BEPS)
- Cost of management (partly as a result of the above)
- Alternate solutions (increased self-insured retention or traditional insurance).
Then Mathew Latham asked the key question to captive owners: “Does the captive add value and is it relevant to the organisation’s operations?”
Praveen Sharma, Managing Director, Global Leader insurance regulatory and tax consulting practice, Marsh reminded the audience that the central goal of OECD is “to develop a fairer, consistent and effective international tax system” and avoid “base erosion and profit shifting (BEPS)”. The key to defend the case is that the captive “must have a commercial rationale” and prove that decisions are made in the elected domicile. Therefore, Praveen Sharma suggested a four step process to make sure that the case robust:
- diagnose: the implications of BEPS for YOUR captive
- design: the set-up needed to meet the BEPS challenges
- change: what is necessary to fit the new design, and
- defend: be ready to defend your choices and decisions.
Finally, Carl Leeman, CRO at Katoen Natie, stressed the importance of FERMA’s action at the level of OECD before states’ tax authorities embark on a journey against captives and he suggested that the attendees should be attentive to three “lines of defence”: commercial rationale, substance and governance, and transfer pricing.
All three speakers agreed that it was essential to be proactive in the justification of the use of a captive as an “efficient use of capital” and ultimate reduction in the TCOR (total cost of risk). This proactivity could be summarised in three words: document, document, document!