OECD BEPS action plan could mean scrutiny for captives

Companies using captives could increasingly come under scrutiny as a result of an initiative launched by the OECD last year designed to counter tax planning strategies that exploit gaps and mismatches in tax rules to shift profits.

This is the finding of Peter Mullen, the chief executive of Aon's global captive and insurance management, speaking at the Bermuda Captive Conference this week.

The Base Erosion and Profit Shifting (BEPS) report, refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid. But the implications of the report for many sectors are only now emerging and the captives sector should be watching the initiative with close interest, said Mullen.

He said that the report, commissioned by the G7, will encourage tax authorities to delve deeper into the operations of businesses to establish where the value is truly being created. Companies could then find themselves forced to change where they pay their taxes on this basis.

“In terms of a captive owner, you could find yourself under scrutiny for amongst other things how you price the risk, the level of capital you hold, where decisions are made and the credentials of executives responsible for those decisions,” Mullen said.

“I expect this to become an increasingly hot topic for the captives sector in the next three to five years. It could certainly put pressure on smaller captives in the same way that Solvency II put pressure on smaller insurers in Europe due to increased regulatory and compliance costs.”