Ferma campaign to defend captives forges ahead

The organisation for Economic Co-operation and Development’s (OECD) project to tackle base erosion and profit shifting (BEPS) is a major concern to many risk and insurance managers with captives, but Ferma’s campaign to dispel misperceptions about captive insurance companies is making progress. The OECD’s aim of stamping out the worst excesses of corporate tax avoidance is laudable, but it was the inclusion of “captive arrangements” in the OECD’s Action Plan on BEPS that resulted in uncertainty for, and concern from, captive owners. In response, there have been considerable lobbying efforts, not least by Ferma, to make sure the OECD is aware of the risk management value of captives and, secondly, to ensure tax authorities take a consistent approach to such vehicles. Ferma is concerned that captive insurance has been affected by negative references in the BEPS reports, resulting in greater scrutiny from tax authorities. This is leading to additional administrative costs for captives. Ferma published a position paper on captives last year as part of a campaign to change misperceptions of captive insurance among tax authorities and ensure a consistent implementation of the OECD’s recommendations on BEPS. While captives are only a very small portion of BEPS, Ferma believes national authorities should be guided on how to assess captive arrangements according to BEPS recommendations. It is still early days, but there are some signs that the OECD has taken on board Ferma’s concerns about the new rules. “The OECD is now aware of and recognises the role of captives as a risk management tool and the related insurance benefit for companies,” said Laurent Nihoul, Ferma board member and general manager of corporate risk and insurance at ArcelorMittal, speaking to Commercial Risk Europe. “We have established a fruitful dialogue with the tax department and the Ferma paper has been passed on to the OECD working party on transfer pricing and [its] financial transaction working group. As such, we do believe that risk managers’ concerns are now fully part of the discussion. “We invite the OECD to take into account our guidelines in future guidance documents and hope we will be able to continue our dialogue with them to support a consistent multilateral approach by national authorities…The main message from the risk management community that Ferma wants to highlight is that the contribution of captives to the financial protection of industries and the global economy should be recognised and valued appropriately by the regulators,” he added. He noted that the OECD is expected to shortly publish a public discussion draft on future transfer pricing guidelines on related-party financial transactions, which will include captive arrangements. The Ferma paper was designed to allow OECD members to assess the compliance of captive (re)insurance arrangements with the BEPS recommendations. “Our paper was well received by the OECD and we are pleased that the OECD recognises the role of captives as a risk management tool and the related insurance benefit for companies,” commented Mr Nihoul. Mr Nihoul said Ferma wanted to dispel misperceptions of captives through detailed explanations about how and why they are used as risk management tools by companies. But Ferma’s main objective is to promote consistency in the way BEPS principles will be applied to captives, he added. “At the core of our paper are the proposed guidelines, which are meant to support national authorities when transposing BEPS actions into their national laws…The objective of our guidelines is mainly to avoid creating a patchwork of diverging national legislations inspired by BEPS,” Mr Nihoul explained. He added: “When it comes to national regulators, we believe that our national member associations are at the right level to become the relevant stakeholders for tax authorities. Each jurisdiction may have a specific tax culture and it’s important that they have a local risk management association in front of them to pursue a more detailed dialogue about the rationale of captive companies and their contribution to the economy.” Will Thomas-Ferrand, strategy and operations leader, EMEA and Asia-Pacific at Marsh Captive Solutions, said the long-term effect of BEPS on captives remains to be seen. Lobbying is needed to ensure there is no disadvantageous treatment of properly structured captives, he added. “There will have to be a demonstrable ‘arm’s length’ business motivation for placing business within the captive, which can be demonstrated to be advantageous from a non-tax perspective. Captives will be required to have policies, procedures and substance in place that justifies this arm’s length, commercial decision-making. The fact that a captive is part of the risk management toolbox for retaining risks in a formal, regulated manner, which is regulated accordingly, will need to be documented and clearly understood in their business plan, which can take account of the group perspective, but also needs to be robust enough to withstand challenges,” he said.

Ferma campaign to defend captives forges ahead

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