emea captive 2014


There is a continual trend of scrutiny and indeed reputational pressures on many international corporates to ensure internal arrangements are transparent from a tax planning perspective, captives included.
 
While many international tax authorities grapple with keeping pace of globalization it is perhaps worth considering a perspective where an offshore captive (typically one domiciled in a country with a zero or low tax regime) is actually a benefit for local tax authorities, as explained further.
 
Tax planning is a sensitive matter for many captive owners and while it is true that tax planning improves the financial viability of a captive it is not and should not be the primary factor for captive use.
 
In my view, a captive should be neither tax positive or tax negative, however, the vast majority of captive programs issue insurance policies to local business units with low deductibles/ retentions (the strategy often cited to improve risk management control). There is perhaps an argument that optimizing the amount of risk retention allocated between the local balance sheet and transferred to a captive may benefit both parties (tax authorities included) as the predictability of corporate tax revenues and expenses is improved.
 
Transferring the majority of risk (and, premium) to an offshore captive domicile offers corporates limited opportunity to carry tax losses forward in the event of major catastrophe insured losses. This scenario actually benefits local tax authorities as the amount of upfront tax deduction given for premium is smaller than the tax credit on the loss that would have otherwise been given by the tax authority if a captive did not reimburse the local business unit. An offshore domicile has limited opportunity to offset the loss against other trading income of the group. In addition, many tax authorities collect premium taxes on gross premiums and given many captive programs issue low deductible insurance policies it is another benefit for tax authorities but not the corporate.
 
That said, transferring premium to an offshore captive was beneficial for corporates when interest rates on assets were high given the time delay between collecting premiums and paying claims, however that may no longer be the case.
 
An optimal captive program that benefits both tax authorities (to reduce uncertainty of tax revenues) and corporates (to fund risk optimally) is one, in my view, which considers:
 
  • Assessing the merits of establishing a captive in a domicile where other group operations are located;
  • Analysing local corporate balance sheet risk tolerance and appetite to understand the allocation of risk retained locally and that transferred to a captive;
  • Appreciation by tax authorities that in the event of a major insured catastrophe loss an offshore captive may indeed reduce uncertainty to tax revenues.