The impact of the OECD’s
Base Erosion & Profit Shifting Project
Ian Kilpatrick
Chair CICA
Task Force Responding to the OECD
IMAC Educational Seminar April 19th 2016
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What is the OECD?
• Originally formed in 1948.
• Later joined by USA & Canada.
• Now 34 of the world’s leading countries.
What is its Mission?
Mission
To promote policies that will improve the
economic and social well being of people
around the world.
IMAC Educational Seminar April 19th 2016
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Why the emphasis on BEPS
Angel Gurria
OECD Secretary General
Comments made at the
launch of Deliverables
16th September 2014
[Aggressive tax practices]
“Erode the integrity of our tax systems;
Damage the capabilities of our
Governments;
Diminish the growth potential of our
economies; and
Corrode the trust of our citizens”
;;;
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Why the emphasis on BEPS (Continued)
• At G-20 Leaders summit in November
2013 OECD obtained a mandate to tackle
BEPS.
• Instructed to produce BEPS Report which
was published in February 2013.
• G-20 and OECD successfully construe ‘tax
avoidance’ as ‘tax evasion’ and introduce
‘moral obligation’ philosophy.
• Report listed 5 other ‘Pressure Areas’ and
included Captives as a ‘vehicle for abuse’.
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Why the emphasis on BEPS (Continued)
OECD Report suggests Captives are vehicles of abuse.
CICA and ECIROA responded saying in part:
• 6,000 Captives worldwide operating in the same
way as traditional insurance companies.
• Captives are an integral part of ERM.
• Captives are the only tool available to MNE’s to
manage otherwise uninsured exposures.
• Captives allow MNE’s to purchase re-insurance.
• Captives allow their parents/owners to insure risks
not available in the traditional market.
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BEPS ACTION PLAN
Identified 15 Actions organized around three
main pillars:
• The coherence of corporate tax at the
international level.
• A realignment of taxation and substance.
• Transparency, coupled with certainty and
predictability.
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BEPS ACTION PLANS (continued)
Address The Tax Challenges Of The Digital Economy (1)
Develop A Multinational Instrument (15)
COHERENCE
Hybrid Mismatch (2)
Strengthen CFC Rules (3)
Limit Deductions (4)
Counter Harmful Tax
Practices (5)
SUBSTANCE
TRANSPARENCY
Prevent Treaty Abuse (6)
Prevent Permanent
Establishment Abuse (7)
Transfer Pricing Outcomes
To Be In Line With Value
Creation (8, 9 & 10)
Collect & Analyze Data (11)
Require Disclosure (12)
Standardize Transfer Pricing
Documentation (13)
Make Dispute Resolutions
More Effective(14)
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BEPS ACTION PLAN (Continued)
Pascal Saint-Amans
Director OECD Center for
Tax Policy & Administration
16th September 2014
“These problems cannot be solved by
individual countries and the worst
thing that could happen is for
countries to take unilateral action.
That is why we need the G-20, OECD
approach to BEPS.”
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BEPS ACTION PLAN (continued)
Pascal Saint-Amans
Director OECD Center for
Tax Policy & Administration
16th September 2014
“BEPS is about rewriting the
international tax rules to realign the
location of the profits with the
location of the real activities.
Currently tax planning results in
locating profits in tax havens where
nothing is happening.”
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BEPS SUMMARY
15 0
VS
Team Multinational
• Prevent use of Tax Havens.
• Introduce Multinational Instrument.
• Generate greater tax revenues.
• Cannot be solved by individual countries.
• Historical, unprecedented co-operation.
• Significant consultation with business,
trade groups and unions.
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MEETING OECD ACTION PLAN FOR COHERENCE
• Know the reasons your Captive was formed:
o Developed to meet business needs not addressed
by the traditional insurance market:
 Tailor-made policies.
 Risks not insured by commercial companies.
o Vital role in risk management.
o Access to reinsurance market.
• If based Offshore, know the reasons why the particular
domicile was chosen:
o Attractive regulation and competence of
regulators.
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MEETING OECD ACTION PLAN FOR COHERENCE
• OECD Action Plan 4 targets “excessive” interest and other
financial payments. Premiums paid to captives fall into
this category
• Need to show that premiums are determined in
accordance with accepted insurance practices. (e.g.,
Arm’s Length Principle or comparable transactions):
o Intercompany transactions must conform to the
same business principles as transactions between
unrelated parties.
o Sufficient premium for coverage; not over or
underpaying.
o Detailed financial analysis needed for risks that are
difficult or impossible to insure.
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MEETING OECD ACTION PLAN FOR SUBSTANCE
• OECD Plans address transactions lacking economic purpose:
o Entered into only to avoid taxes.
o That would rarely take place between Non- Related
parties.
•
They apply not only the recognized Two-Tiered Test:
o Must impact taxpayer’s economic position.
o Needs to have a legitimate non-tax business purpose.
•
But a third criterion:
o Management and control of transaction.
•
•
•
•
Ensure profits in line with economic substance of activities.
Focus on where important people functions are performed.
Ensure capital allocated is in line with risk.
Captive premium paid should be appropriate for the risk.
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MEETING OECD ACTION PLAN FOR SUBSTANCE
• Captives guard against disruptive scenarios:
o Protect the continuity of a company’s business plan.
o Address issues of availability and affordability.
• Efficient and effective at addressing risk management needs.
• Risk distribution – an accepted prudent business practice:
o a legitimate means for shifting insurance risk.
• Captives must meet regulatory, actuarial, accounting, and
capital requirements.
• Premiums determined by Arm’s Length Principle.
• Involves real economic transfer of risk.
• Satisfy requirements of economic substance.
• Managed by qualified personnel (MBAs, CPCUs, CPAs, CRMs,)
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MEETING OECD ACTION PLAN FOR TRANSPARENCY
• Demand for Tax Transparency:
Society’s push for ‘fairness and equality’.
o 2008 down turn fueled the fire.
o Global regulation initiative.
o Clear and accurate reporting of corporate tax
transactions.
• Regulatory Controls (How they affect Captives)
• Time consuming but substantiates Captive’s legitimacy:
o Anti-Money Laundering and Know Your Client
documentation.
o Application Process - more information required.
• Ongoing Regulatory Monitoring.
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MEETING OECD ACTION PLAN FOR TRANSPARENCY
• Financial Reporting - Certified audited financial
statements.
• Actuarial Study sets loss reserves:
o Used to determine appropriate premium and profit.
o Reviewed during audit testing.
• Tax Returns:
o Usually consolidated with parent.
o In USA FATCA & FBAR as well as State Tax Filings.
• Regulatory Compliance Reporting:
o Annual report & audited financial statements.
o Actuarial opinions.
o Board minutes.
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OECD BEPS PROJECT SUMMARY
[the BEPS Project could end up]
“Redefining the architecture of
international taxation; rules; tax
treaties; guiding principles;
recommendations and
decisions within the OECD.”
Pascal Saint-Amans
Director, OECD
Center for Tax Policy &
Administration
13th February 2013
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