09 August 2017

Commercial Risk Europe: BEPS not a threat to captives if used correctly

Spanish and European captive owners should not be overly concerned about the OECD’s Base Erosion and Profit Shifting 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.

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.

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 said 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.

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