The OECD’s BEPS has been an ongoing issue for the captive insurance, how are the major domiciles dealing with this? And where are those domiciles in terms of implementation of the framework?
Although the Organisation for Economic Co-operation and Development (OECD) and G20’s action plan was released back in October 2015, with consultations on the initiative taking place for a number of years prior to this, the majority of jurisdictions have yet to enact the action plan guidelines fully. As a result of this, the majority of domiciles are adopting a ‘wait and watch’ position. This is somewhat understandable given the fact that each jurisdiction has the authority to interpret and apply base erosion and profit sharing (BEPS)-related measures as they deem fit.
It is important to note that it is not only the approach of the jurisdiction where the captive is based that needs to be considered, but more so the jurisdiction where the captive owner is based and potentially the locations of insured parties.
What we are seeing more of in the major domiciles is a rising awareness, and the identification of the need for education on the subject. Captive associations in many domiciles are organising briefing sessions and facilitating Q&As with service providers to socialise the challenge locally. BEPS is now almost a compulsory topic at the usual domicile captive conferences, which is evidence of how important the topic is regarded by the industry.
One of the interesting aspects about BEPS is that, although it will likely affect each domicile, the perception around the extent and nature of the impact differs per domicile, with some locations adopting the stance that BEPS is an opportunity as opposed to a threat.
In the first six months of 2017, what do captives and their managers need to look out for in terms of BEPS?
Positive preparation is key. Although the ultimate guise of BEPS in all jurisdictions is still to emerge, there is enough in the principles covered in the OECD Action Plan for captives to be preparing for.
A sensible approach for the first six months of 2017, and something we are speaking to clients about, will be to review the captives’ positions in relation to the principle expectations of the BEPS package. Measuring the captive against key metrics and documenting where positive compliance can be demonstrated, and where remedial action is required, will allow the captive owner to begin thinking about BEPS in specific terms that are actionable.
This can lead to an action plan, which ultimately puts the captive in control of the BEPS challenge and removes much of the uncertainty that currently exists for many captive owners.
The concept of positive compliance is an important one—preparing for the challenge of BEPS is as much about identification and documentation of all the things the captive does well as it is about identifying potential areas that may not be fully aligned to BEPS expectations.
There is no prescribed checklist to mark your captive against to achieve definitive assurance, the BEPS span is more fluid and wide ranging. With this in mind, we would suggest that a self-evaluation or BEPS ‘health-check’ would be positive first preparatory steps to keep captive owners on the forefront.
Willis Towers Watson recently launched a new BEPS captive product. How will this help clients with implementation?
The purpose of Radar is to provide captive owners with a clear blueprint to BEPS compliance, captive value and future strategy in a format that is reviewable and that supports high-level governance and oversight. Our approach is straightforward—review, analyse, document, action, respond—which was the inspiration for the name.
Captive owners will require a response framework that reflects the multidimensional nature of the BEPS challenge. Our Radar tool blends quantitative and qualitative measurement metrics across three core areas—transfer pricing, economic rationale and substance.
One of the things we were conscious of in developing our offering was the potential mismatch between those less familiar with captive concepts and the captive industry, and the difficulties that this mismatch may cause.
Being able to effectively demonstrate and assign a value to the nuanced and indirect ways that a captive promotes better group risk management, for example, are benefits that need to be considered in the overall BEPS evaluation and something the Radar framework accommodates.
However, to be completely effective, this perspective needs to be bi-directional. Radar also tests key financial metrics in a manner similar to that of a tax investigator, which provides the captive owner insight into where a potential misconception or genuine compliance risk may exist. A key benefit of this approach is that it provides quantitative measures to aim towards, as opposed to unmeasurable qualitative remedial recommendations.
Overall, Radar underlines our approach to BEPS, which is primarily about positive compliance and building on the positive, bone fide risk management benefits that captives provide.
What kind of data flows through a captive in this day and age, and how will analysis and interpretation help captives to navigate regulatory hurdles such as BEPS?
Clearly, financial data is critical, predominantly around losses. Analysis of this data has always been a key plank of any successful captive strategy, whether in respect of risk management, risk financing and transfer pricing, and so on. But a captive can provide indicators of other forms of value too—not necessarily financial but strategic and operational.
Capturing these through captive oversight and analysis, evaluating the benefits from a parent perspective, and ensuring ongoing alignment with a changing market environment and the demands of the business will all help to support compliance with BEPS.
Although generally viewed by the industry as a defensive initiative, BEPS will prompt more captive owners to critically assess the value, in all its many forms, that the captive creates, and data will be critical to this.
Assessment and measurement of value created by the captive will likely lead to improvement actions, which in the long term will be good for the individual captive. If you can’t measure it, you can’t improve it, and data is the key to measurement. This applies to improvement in the context of BEPS, but also more generally to the entire captive strategy.