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Captive Insurance Primer on OECD's Transfer Pricing Impact Presented at SC Conference

Primer
September 23, 2015

One of the most insightful sessions at the 16th Annual South Carolina Captive Insurance Association (SCCIA) Executive Educational Conference, which concluded September 23, 2015, was presented by Ian Kilpatrick, Captive Insurance Companies Association (CICA); Joel Chansky, principal, Milliman; and Matt Gravelin, senior manager, Johnson Lambert LLP. While the title of the presentation might have kept some conference attendees away, the content of "Strategies for Transfer Pricing—The Impact of the OECD’s Base Erosion & Profit Shifting Report" is of particular importance to captives that are domiciled outside of the United States.

The Organisation for Economic Co-operation and Development (OECD) was originally formed in 1948 and now includes 34 market-driven countries, including the United States and Canada. Its stated purpose is "to promote policies that will improve the economic and social well-being of the people around the world."

The title of the SCCIA presentation is derived from the technical terminology for the implied negative impact of multinational companies' use of legal tax avoidance strategies on national tax bases.

Angel Gurría, secretary-general of the OECD, commented in 2014, “[Aggressive tax strategies] erode the integrity of our tax systems, damage the capabilities of our governments, diminish the growth potential of our economies, and corrode the trust of our citizens....”

Beginning in 2013, the G20 and OECD successfully argued that “tax avoidance” is actually a form of “tax evasion” and introduced a moral obligation philosophy. Their report included a reference to captives as a method for abuse. The OECD Action Plan targets “excessive” interest and other financial payments. Premiums paid to captives fall into this category.

The presenters  provided a brief outline of ways for captives domiciled offshore to guard against being targeted under the new action plan. Steps include the following.

  • Know the reasons why the domicile was chosen.

  • Be able to talk about the competency of the regulators and the attractive regulation.

  • Know the reasons why your captive was formed, as follows.

  • Captive developed to meet business needs not addressed by the traditional insurance market.
  • Captive plays a vital role in risk management.
  • Captive provides access to the reinsurance markets.
  • Ensure the capital allocated to the captive is in line with the risks assumed.             

Captive owners are also encouraged to pay attention to the developments associated with base erosion and profit shifting (BEPS) and support efforts by the captive associations to promote the positive aspects of the captive industry.

Captive.com is working to secure a full copy of the presentation that we hope to make available on our website.

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