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Why Captives Should Care about OECD Actions Topic of CICA Panel

2015 CICA Entrance
March 11, 2015

How captives are affected by the Organization for Economic Cooperation and Development (OECD) and G-20 efforts to eradicate base erosion and profit shifting (BEPS) by multinational corporations was the topic of a panel discussion at the Captive Insurance Companies Association (CICA) 2015 International Conference, held March 8-10 in Orlando.

During the "CICA's Best Practices and Strategies for Transfer Pricing" session, captive guru Ian Kilpatrick, founder of Advantage Insurance Holdings, Ltd., and the CICA 2015 Distinguished Service Award winner, described his frustration and aggravation with OECD’s tax harmonization efforts. Joining Mr. Kilpatrick on the panel were Joel Chansky, consulting actuary, Milliman, Inc.; and Matt Gravelin, senior manager, Johnson Lambert LLP.

Mr. Kilpatrick brought session attendees up-to-date on 8 of what will eventually be 15 OECD reports that seek to support action creating coherence among national taxes. OECD wants taxation with the location where the real activity of a corporation occurs. For captives, this means in the domicile where the captive is located. One impact of such action is that it could make it necessary for captive managers to perform more than accounting at their offshore locations. It might be necessary for offshore managers to make underwriting decisions and to perform the underwriting function.  

If OECD recommendations are implemented, Mr. Gravelin predicted the additional reporting requirements will be substantial.  

Panel members concurred that OECD was overreaching and that the captive industry should be proactive in making its view known. CICA and the European Captive Insurance and Reinsurance Owners Association (ECIROA) have previously expressed their disappointment and concern about the reference to captive insurance in the OECD's February 2013 "Base Erosion and Profit Shifting" report. A joint May 2013 letter from these associations included the following.

The reference to Captives misusing their structures for tax circumvention or avoidance is misleading and without significant basis. Captives are extremely valuable risk management instruments which strengthen the market position of their parent company or organization during times of heavy claims and losses by facilitating the establishment of reserves to meet future losses (which is otherwise not possible under local GAAP/IFRS standards). 

The most important point is that captive insurance companies are just that--insurance companies. Like all insurance companies, they are highly regulated by financial authorities where they are registered. Captive insurance companies are a risk financing tool that is essential for stable business operations, not a tax avoidance business.

Read the 2013 OECD "Action Plan on Base Erosion and Profit Shifting." Read the CICA/ECIROA joint response.

(Pictured above is a scene from the Captive Insurance Companies Association (CICA) 2015 International Conference, held March 8-10 in Orlando. Below is a look at the exhibit hall.)

CICA 2015 Exhibit Hall

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