The captives industry should make sure to closely monitor the Base Erosion and Profit Shifting (BEPS) report, published by the OECD last year.
This is the opinion of Richard Irvine, managing director and tax leader at PwC Bermuda, speaking at the Bermuda Captive Conference last week. He explained that although the situation should be monitored, there is no need for participants to be worried.
Irvine said that in his view captives have a lot more substance than other types of structures targeted by the initiative and should not have to consider extensive changes as a result.
“Captives use a lot of advisers including underwriters, investment managers, captive managers and other professionals usually based in the domicile of the captive,” he said. “That is very different to so-called IP holdco companies, which simply own intellectual property rights and do little else.
“So in my view captives are very different and should fall outside the type of problematic arrangements the OECD is targeting. The whole point of BEPS is to target structures that are tax motivated and the reality is that most captives are not set up for that reason.”
However, Peter Mullen, the chief executive of Aon's global captive and insurance management, believes that companies using captives could increasingly come under scrutiny as a result of the initiative designed to counter tax planning strategies that exploit gaps and mismatches in tax rules to shift profits.
The implications of the report for many sectors are only now emerging and the captives sector should be watching the initiative with close interest, said Mullen.
He said that the report, commissioned by the G7, will encourage tax authorities to delve deeper into the operations of businesses to establish where the value is truly being created. Companies could then find themselves forced to change where they pay their taxes on this basis.
“In terms of a captive owner, you could find yourself under scrutiny for amongst other things how you price the risk, the level of capital you hold, where decisions are made and the credentials of executives responsible for those decisions,” Mullen said.
“I expect this to become an increasingly hot topic for the captives sector in the next three to five years. It could certainly put pressure on smaller captives in the same way that Solvency II put pressure on smaller insurers in Europe due to increased regulatory and compliance costs.”
OECD, Bermuda, Captive, Bermuda Captive Conference, Richard Irvine, PwC Bermuda, Peter Mullen, Aon