Ferma urges OECD to adopt existing captive regulatory definitions in BEPS guidance

Ferma has urged the Organisation for Economic Co-operation and Development (OECD) to take advantage of existing regulations governing captives in planned guidelines on base erosion and profit shifting (BEPS), to ensure the initiative does not create “disproportionate uncertainty and administration” for multinational entities. The call comes in Ferma’s official response on the captive aspects of the OECD’s public discussion draft BEPS Actions 8-10 Financial Transactions document, which deals with the relationship between transfer pricing and value creation. The federation is specifically calling on the OCED to refer to the IFRS 17 and International Association of Insurance Supervisors (IAIS) definition of “genuine insurance transaction” and “insurable risks” as part of its guidelines on captives. Ferma has told the OECD that current insurance regulations are extremely stringent about the control of various captive functions – such as direction, underwriting, actuarial and accounting expertise – and further indicators are, therefore, not needed. “Ferma wishes for OECD to produce final guidance that is clear and robust enough to provide multinationals with some legal certainty in terms of their captives. A further layer of regulations to be applied by national authorities could create a risk of confusion, uncertainty and ultimately more administration for multinationals and tax authorities without providing the desired outcome for tax authorities,” said Laurent Nihoul, Ferma board member with responsibility for captives. The OECD’s project to tackle (BEPS) has been a major concern for many risk and insurance managers with captives following the inclusion of “captive arrangements” in its Action Plan on BEPS. 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 was concerned that captive insurance has been affected by negative references in the BEPS reports, resulting in greater scrutiny from tax authorities and, potentially, additional administrative costs for captives. Ferma previously published a position paper as part of the campaign to change misperceptions of captive insurance among tax authorities and ensure a consistent implementation of the OECD’s recommendations on BEPS. In that position paper and its latest submission to the OECD, Ferma argued that captive insurance is an important tool for European multinationals that can reduce total cost of risk and improve loss experience through better understanding of claims. It seems that progress has been made. Ferma said it is “pleased that captive insurance companies are now more generally perceived as a way for multinational groups to manage risks within the group and that they are a component of a risk and insurance management strategy”. It said the OECD discussion draft also offers a better understanding of captives as small insurance enterprises, recognising there are various types of captive, and shows improved understanding of reinsurance captives. In its latest response to the OECD, Ferma has urged for continued dialogue with European multinationals and their risk managers to further develop understanding about the use of captive (re)insurance companies by multinational enterprises. It also hopes such dialogue can promote consistency in the way BEPS principles are applied to captives by national authorities, and encourage practicality and proportionality in future OECD guidance on captives.

Ferma urges OECD to adopt existing captive regulatory definitions in BEPS guidance

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