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Risk in Context

Preparing Your Captive for the New OECD Changes

Posted by Nick Gale 13 June 2017

The Organisation for Economic Co-operation and Development (OECD) has proposed changes to international tax laws aimed at tackling aggressive tax planning, which could affect the way captives approach transparency and tax. The OECD has specifically named captives as a potential vehicle for tax avoidance, meaning that they are likely to be subject to increased scrutiny.

Base erosion and profit shifting (BEPS) refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low- or no-tax locations. The UK implemented a new tax, Diverted Profits Tax (DPT), in 2015 to incorporate many of the BEPS recommendations into local rules, and other countries are likely to adopt or apply similar rules going forward. The changes are set to have a particular impact on the following areas:

  • Captive parent and subsidiaries might be required to justify the commercial rationale for transactions with a group-owned captive (re)insurance company to local tax inspectors.
  • How and where a captive’s profits are ultimately taxed.

In addition:

  • The captive (re)insurance company’s premium should conform to the latest transfer-pricing guidelines.
  • Multinational companies will be required to submit high-level information to a central registry, where it will be available to local tax inspectors, and maintain a local file about their operations by entity.

Multinational companies with large captives will need to be prepared to demonstrate their alignment to the BEPS principles of transparency and economic substance or face potential reputational damage and financial penalties.

Companies Need to Act Now:

When considering how the changes could affect your captive, you should take the following steps to check it is aligned to BEPS principles and can be accurately and consistently explained to internal and external stakeholders, such as tax inspectors:

  • Document financial and non-financial benefits of the captive and how it adds value to local entities and the group.
  • Document why the captive was established in its current domicile.  Compare key captive operating functions against best practices within the industry.
  • Evaluate the most appropriate transfer pricing methodology and prepare an appropriate analysis to support captive premium.
  • Review and provide guidance on information requirements by applicable country.

In addition to the above, you can consider seeking risk expertise in order to perform a “health check’” on your captive, in regards to the recent changes.

For more information on how Marsh is #ReimaginingRisk at #Airmic2017, follow us on Twitter or visit https://www.marshatairmic.co.uk/.  

Nick  Gale

Advisory Practice Leader EMEA APAC, Marsh Captive Solutions.