14/07/2016

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.