Mike Stalley
FiscalReps

Although the Panama Papers brought focus to the appropriate use of a captive, Mike Stalley of FiscalReps suggests the leak could benefit the industry

Since the release of the Panama Papers, has the scrutiny of captives increased internally, externally, or both?

The awareness of the use of complex offshore financial structures in general has certainly increased, although not necessarily direct scrutiny of captives.

With greater transparency demanded by many stakeholders, and with increased scrutiny from the media, it’s probably inevitable that the appropriate use of captives, as part of an overall risk management strategy, will be considered by multinational corporations that wish to be more transparent in their operations and structure.

Conversely, the additional scrutiny could benefit the captive industry as it presents an opportunity to sell the use of a captive structure as a transparent, non-aggressive risk transfer mechanism.

The majority of captives are formed for risk management reasons, rather than for tax purposes, so providers of captive solutions can demonstrate the value of captives to the wider business world.

What concerns, if any, have the Panama Papers raised among your clients?

Most public companies that own captives are already required to make significant disclosures about all their holdings, this is so the ability to ‘hide’ assets offshore is already significantly reduced.

What bearing does this leak have on captives’ tax planning? What are you recommending?

These leaks have certainly brought the subject of aggressive tax planning more into the spotlight. At FiscalReps, we do not promote aggressive tax planning, we focus on achieving and maintaining tax compliance for clients. Tax is a consequence of doing business—it should always be considered in any commercial arrangements, but making arrangements primarily for tax reasons is, in my opinion, never a wise approach.

Interestingly, topics such as base erosion and profit shifting (BEPS) regulation and increasing activity from many tax authorities are already focusing the minds of many multinational organisations on tax compliance. The release of the Panama Papers is really another push in that direction.

From a transfer pricing perspective, the simplest argument for a tax authority to assert is that the premium being charged by the captive to its insured party is not at arm’s length, by reference to premiums paid for similar risks in the open market.

That, in essence, is the transfer pricing argument—is the premium being charged artificially inflated or deflated, either in order to shift profits to a lower tax jurisdiction or to shift costs to a higher tax jurisdiction?

In my opinion, the strongest defence is for a captive to demonstrate that the risks it is insuring are non-typical by their nature, with equivalent coverages unavailable in the open market.

Placing a vanilla property damage, business interruption or general liability policy through the captive may not meet that test adequately.

Secondly, designing a risk transfer programme that encourages the right risk behaviours from participating insureds, with an insurance policy being an element of the wider programme, will create a contract of insurance that is not comparable with those available on the open market.

The greater the differential between the bespoke captive insurance policy and the equivalent vanilla open market policy, the easier it is to demonstrate that the captive premium is fair for the risk being insured, and not artificially set based on equivalent open market coverages.

We have a number of clients who are very creative in their use of captives and the insurance coverages they write, with the key benefits being better risk management, lower costs to the business, and the alignment of corporate behaviours across the business.

Looking to the future, how will corporates weigh their reputations and contentious tax issues?

The reputational value of a business is very hard to assess, but it’s easy to lose quickly with the wrong headline regarding a corporate’s tax affairs.

Within our client base we have seen a real desire to become fully compliant and transparent when it comes to taxes—a drive to be that good corporate citizen and pay the right amounts of tax to the right tax authorities.

Making decisions and implementing aggressive tax planning strategies, I believe, will be subject to increasing internal scrutiny before final decisions are made, with the need to manage reputational risk being one of the key factors to consider.

Interviews
The latest interviews from Captive Insurance Times
Features
The latest features from Captive Insurance Times
What should a captive look for when hiring a firm to manage its portfolio? Stephen Nedwicki of Comerica Bank takes a look
US captive insurance association leaders discuss the present challenges and future of the business, as federal policy confuses and SME growth continues
Join Our Newsletter

Sign up today and never
miss the latest news or an issue again

Subscribe now
Becky Butcher finds out why captive insurance is such a natural fit for financial institutions and how they will continue to dominate the market
With London’s ILS hub set for an autumn launch, Guernsey Finance’s Dominic Wheatley shares his thoughts on what to expect
Guernsey’s hard work is paying off as China looks to stretch the boundaries of its captive strategies. Becky Butcher reports
Guernsey’s ILS numbers reveal a booming market made better by regulatory innovation. Becky Butcher reports
A bigger market means an improving financial performance, perhaps even higher returns. Marsh’s annual analysis of the captive insurance market, now in its tenth year, discovers that it also means change
Attendees of the European Insurance Forum in Dublin heard how insurance and reinsurance professionals are readying for turbulent times ahead
Domicile profiles
The latest domicile profiles from Captive Insurance Times
Debbie Walker of the North Carolina Department of Insurance tells Becky Butcher why the state is among 2017’s standout performers
Experts convene to talk to Becky Butcher about the stability that Guernsey represents in a challenging financial and political environment
Asset Servicing Times

Visit our sister site
for all the latest asset servicing news and analysis

assetservicingtimes.com
In an era of increasing uncertainty, Tamatoa Jonassen suggests that the Cook Islands can be a bridge to financial security in a captive
With a dedicated captive plan in place, the Lone Star State is on the rise, says Josh Magden of the Texas Captive Insurance Association
After 36 years of captive business, Vermont boasts a culture of legislative change, and still has a few tricks up its sleeve. Dan Towle and David Provost explain
After a successful 2016 and the licensing of its first securitisation cell company, Malta insurance industry professionals are looking ahead to 2017
Missouri’s captive programme is approaching a decade in operation. John Talley explains how the state has made it to this milestone
Less than 10 years ago, the Bahamas was a virtually forgotten player in the external insurance marketplace, according to Tanya McCartney and Michele Fields. But today, the jurisdiction has a reputation as a market leader