The future of captives

By Loic Webb-Martin

Some say there is no such thing as bad publicity. The profile of the captive insurance sector is increasing, but not for the right reasons. It was recently singled out in the OECD’s Base Erosion and Profit Shifting (BEPS) agenda; it's regarded, along with the rest of the insurance industry, as high on the tax risk agenda; and is attracting more scrutiny than ever before. We have identified three critical issues to address to make sure that when your captive insurer comes under the spotlight, it’s for the right reasons.

Permanent Establishment and substance: making sure you can prove you’ve got the right substance, in the right place at the right time is key to avoid an unintentional tax footprint where you don’t want it. That’s not new, but may not be enough anymore, the OECD announced a radical shake-up to the PE rules which – if they’re passed – would mean collecting premiums and insuring risks in a territory would create a PE there.

Transfer pricing: the direction of travel from the OECD means that the Risks and Capital paper due out shortly is likely to have a clear focus on evidencing how compelling the commercial drivers are for captive insurance transactions; how risks are supported, including capital required and the return it generates; and how risks are managed including through the use of service providers.

Transparency & disclosure: the commercial, operational and financial profile of your business will be easily understood by tax authorities under the country-by-country reporting regime. What will they make of how profit is attributed across your value chain, and how well that aligns with your revenues, assets and, perhaps most importantly, your people?

That’s a challenging backdrop, and you need to work out the best way forward. Think about what your risk finance model looks like and assess how these changes will impact you. Get your voice heard while there’s time – with tax authorities, industry bodies and the OECD itself. And be prepared to give your perspective – internally and to the wider community.

For more information please see our more detailed paper on this issue or contact your usual PwC adviser.

Loic Webb-Martin (0) 207 213 5451 or [email protected]