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CICA Webinar Looks at Base Erosion and Profit Shifting (BEPS)

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October 21, 2014

The Organization for Economic Cooperation and Development (OECD) plan for tax base erosion and profit shifting is already affecting corporations, even though implementing the recommendations will be challenging, according to the speakers at last week’s Captive Insurance Companies Association (CICA) seminar on transfer pricing.

Webinar polling results revealed attendees’ opinions were in line with tax industry surveys indicating that even though audits are already raising more issues related to base erosion and profit shifting (BEPS), few companies expected to make any changes in the next 2 years.

Panelist Ian Kilpatrick, founder/director, Advantage Insurance Holdings Ltd., and chair of the CICA Transfer Pricing Work Group, said OECD recommendations should not be underestimated. OECD has already made a significant impact on the industry with its efforts to drive increased transparency.

“If you go to an offshore domicile today, it is a very different place than it was 10 years ago because of OECD,” Mr. Kilpatrick commented.

Panelist Joel Chansky, consulting actuary, Milliman, Inc., stressed the need to:

  • Clearly document why your captive chose its domicile
  • Demonstrate the risk management and substantial business purpose of your captive
  • Know where the rest of the company’s business is or is not transacted
  • Show decisions are made by key personnel who understand all aspects of each corporation’s risks

Mr. Kilpatrick estimated that companies will likely see the most impact in the area of decision-making authority.

“We’re going to see the OECD forcing issues, particularly regarding substance and realigning the profit to where the people are,” Mr. Kilpatrick explained. “It’s essential to make certain you can demonstrate that appropriate decisions are being made in the domicile, there are people with the capability of binding the corporation in the domicile, and that the real decisions are not made at the home office,” he added.

Panelist Matt Gravelin, senior manager, Johnson Lambert LLP, emphasized establishing a formal documentation process that demonstrates use of industry standards. “Clearly outlining how your captive has considered the arm’s-length concept, use of qualified third-party service providers, sound actuarial techniques, and significant federal and state regulatory oversight will prove the necessary due diligence to comply with IRS, OECD, and other foreign regulatory regime requirements,” Mr. Gravelin said.

Mr. Gravelin also noted that many foreign captives insuring U.S. risks have considered or should consider the 953(d) election to avoid complexity and costly expense to comply with the Controlled Foreign Corporation rules, which were designed to help prevent some of the same concerns raised by the OECD.

CICA and European Captive Insurance and Reinsurance Owners' Association continue to advocate on behalf the captive community at OECD. The CICA website contains a detailed plan for addressing the 2013 OECD Action Plan on Base Erosion and Profit Shifting as well as other reports on its leadership and advocacy on issues of importance to the captive insurance industry.

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