21 September 2018Analysis

Rely on existing regulations for European captives, FERMA urges OECD

The Federation of European Risk Management Associations (FERMA) has urged the Organisation for Economic Co-operation and Development (OECD) to use existing international regulations governing captive insurance companies when it publishes new guidelines on transfer pricing and value creation.

A frequent concern of the OECD when considering the transfer pricing of captive transactions is whether the transaction concerned is genuinely one of insurance - for example whether a risk exists and, if so, whether it is allocated to the captive in light of the facts and Circumstances.

FERMA argued that a further layer of regulations to be applied by national regulatory authorities could create a risk of confusion, uncertainty and ultimately more administration for multinationals and tax authorities without providing the desired outcome for tax authorities.

The association said that IFRS 17 and the International Association of Insurance Supervisors (IAIS) already provide definitions for terms which OECD is considering: “genuine insurance transaction” and “insurable risks”.

FERMA suggested that IAIS guidelines are also extremely stringent about the control of various functions of a captive such as direction, underwriting, actuarial and accounting expertise. Furthermore, it said Solvency II regulations are applied to captives as they are to all other insurance companies, but in a manner proportional to their size and activities.