BEPS not a threat to captives if used correctly: San Millán

Spanish and European captive owners should not be overly concerned about the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) initiative, as long as their captive is being used correctly as a genuine risk management tool, rather than for fiscal purposes, according to Daniel San Millán, risk manager at leading Spanish conglomerate Ferrovial. The OECD introduced its BEPS initiative as part of efforts to stamp out tax avoidance strategies that exploit gaps and mismatches in tax rules by artificially shifting profits to low tax or no-tax locations. The BEPS rules are not mandatory, but more than 100 countries and jurisdictions will implement its measures. In late May, more than 200 delegates from 83 countries and jurisdictions, as well as 12 international and regional organisations, met in Noordvijk, the Netherlands, for the third meeting of the Inclusive Framework on BEPS. The meeting welcomed Vietnam as its 100th and newest member, discussing and approving its first monitoring report. This report was submitted to G20 Leaders for their summit held on 7-8 July in Hamburg, Germany. There is concern among a rising number of risk managers across Europe that captives will find themselves under scrutiny because of BEPS. Some risk managers have told Commercial Risk Europe during this year’s annual European Risk Frontiers survey that they fear BEPS will make it harder to justify captives to their chief financial officers and boards. On 20 June, Ferma released proposed guidelines for captive (re)insurance arrangements to try and help ensure a consistent implementation of the BEPS recommendations. The guidelines are intended to help support national administrations when they transpose BEPS actions into their national laws. They also aim to clarify the commercial rationale, substance, governance and transfer pricing/premium setting process used in captives for non-experts. Mr San Millán conceded that captives do need to be explained to non-experts, but stressed that, in his view, there is no need for risk managers to panic if they run their captives for the right reasons. “I am not worried about BEPS. If you are using your captive as a fiscal tool, then it is dead anyway. A captive is a risk management tool. When I talk to my colleagues about the captive I do not talk about fiscal matters. I know that captives may have originally been used in this way a long time ago. But today captives are a central risk management tool,” Mr San Millán said. During our Madrid Risk Frontiers event there was much discussion about the state of the commercial and corporate insurance market, how long insurers can suffer the prolonged soft market and whether the underwriting cycle is actually dead. The consensus among speakers and delegates was that, for now at least, there are few signs of a hardening around the corner. The market remains firmly in the buyer’s favour. But, as Mr San Millán pointed out, this is not necessarily good news for captives because when insurance markets are soft, risk managers tend to use them less. He does not believe that this is always the best approach. “I think the biggest risk for captives is actually the soft market. It is so, so soft that captives are not seen as an efficient use of capital anymore. But this is not my strategy. My strategy is to capitalise the captive so that we are ready for the bad times ahead,” he explained.

BEPS not a threat to captives if used correctly: San Millán

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