Captives: Navigating the tax maze

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Captive Tax Maze

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Insurance, regulation and tax are not the problems facing the discipline of risk management; the problem is risk. Risk is what we seek to better manage by using captives. Tax charges and regulatory compliance are also part of the landscape of risk; an adjunct to the insurance solution captives offer. A properly thought-out and executed strategy with the right tools ensures that the captive generates maximum value to its shareholder.

Introduction

Classroom Spiel and Market Realities

On paper, captives purportedly take business away from the conventional market and write insurance across borders.

 

In practice, demand for capacity in the conventional insurance market continues to grow unabated even with unprecedented growth in the number & type of captives and jurisdictions. Why?

 

The reality is that most captives do not have the critical mass (in terms of capacity, risk appetite and expertise) to ‘compete’ with the conventional market and they generally thrive in cooperation with the conventional markets. It also benefits the conventional market to engage with the captive insurance sector because, by and large, captives ‘improve’ businesses’ risks with more robust risk management. By default, captive retentions represent ‘skin in the game’ which, in turn, aligns interests and drives better risk control. They are also far less promiscuous as risk partners than the largely broker-driven conventional international insurance placements.

 

Another challenge for most captives of international insurance programs when compared to conventional international insurers is the ability to write across borders. Some industry commentators would contend that the EU has done away with most of the barriers relative to cross-border insurance delivery at least across EU/EEA states. Whilst in theory this is true, in practice some EU states continue to erect “speed-bumps” or “sleeping policemen# that hinder the extent of market entry.

“Writing business across borders poses challenges to captives. The EU, for example, may have removed barriers to entry but regulatory and fiscal adherence sometimes present more of a labyrinth than a straight path.” 

Sleeping Policemen        

Writing Across Borders in the EU

Differences in the interpretation of EU directives concerning the conduct of insurance is one of the main nuisances (for example Freedom of Services vs Freedom of Establishment).Some EU host-jurisdictions heavy-handedly push for freedom of establishment when faced with applications from other EU jurisdictions under Freedom of Services directive. Fiscally, and from a supervision perspective, it gives the host country greater control of business being written in its territory and it purportedly improves consumer protection within the host territory. However, (a.) it goes against the spirit of Freedom of Services, (b.) creates a higher cost burden for companies and (c.) is not wholly applicable to captives (or PORCs) since the business is driven and/or is being written for the benefit of the ultimate beneficiary owner/s.

 

Another ‘barrier’ is in application of consumer protection funds or pools and or other parafiscal charges applicable to premiums. Who should be contributing to them and how much? Sometimes the amounts due or mode of payment (i.e. pre-funded parafiscal charges in certain territories and on certain classes of business) make it economically prohibitive for a captive to extend its program to a particular country.

The most basic (and common) barrier for captive participation is that it would not have the necessary local expertise in each of the markets where its ultimate beneficiary owners’ risks are located.

 

These are some of  the ‘sleeping policemen’ that dictate a higher level of cooperation between captives and the conventional international insurance market.

 

 

Tax

Highest Hurdles

Since it might be technically incorrect to talk of barriers to entry within the EU, let us instead call them hurdles. If implementing an EU-wide insurance program is a steeplechase, then the hurdles vary in size …

the higher ones posed by the differences in the application of tax on insurance premiums in the various jurisdictions. While tax should not be the determining factor whether captives should participate in a particular jurisdiction or not, capacity and program design would be influenced by tax considerations. Some jurisdictions attract higher insurance premium tax (such as the United Kingdom (12% – 20%), Germany (19%), Netherlands (21%) and Finland (24%)). Other have complex insurance fiscal and parafiscal systems (such as France at between 7% – 30% or Italy at between 0.5% and 21.25%).

 

Let us consider the following simple example: A European company has a property insurance premium bill of € 20 million in conventional insurance property policies on its sites in Germany and France (€ 10 million), United Kingdom (€ 5 million), and various other EU locations ((€ 5 million). If the risks were to be insured conventionally then, overall, they might attract up to around € 5 million in IPTs and or other parafiscal charges. A captive solution (reliant on the international reinsurance market) marrying lower/ differing priorities with overlying aggregate (loss-ratio based) XoL reinsurance feeding the conventional retrocession market can arguably shift or reduce the fiscal and/or parafiscal liabilities enough to justify capitalising a captive insurance company in a Solvency II jurisdiction with only the first year of tax savings!.

 

But to do that one needs to have more than just a tax compliance calculator in hand. To navigate this tax labyrinth, one requires the combined insurance and tax compliance acumen and mindset.

“Give unto Caesar ….”

I am a strong advocate of utilising captives as a “risk ownership and a management” tool and have been known to be critical of ultimate beneficiary owners whose primary focus is fiscal arbitrage. I have in fact, in the past, labelled such strategies as myopic and short-lived because of the dynamic nature of fiscal legislation.

 

I continue to stand by this. We may view taxes as evil, but my view would continue to be that they are a necessary evil which is outweighed by the benefit they then provide in terms of the common good.

However, if some fiscal advantage accrues adjunct to other core benefits of a captive insurance solution then ultimate beneficiary owners would be well justified in reaping it, especially if it serves to build capacity and a more resilient risk-carrying captive. The ice-berg effect suggests that this would also ultimately be to the economic benefit of the host territories and not just the ultimate beneficiary owners.

To reap these benefits, one needs to have access to the necessary tools to measure the financial and fiscal impacts of different premium scenarios in the respective jurisdictions.

 

TMF Group’s Tax Calculator

There are various firms that provide international fiscal advice and/or localised treatment for insurance entities including captives. Besides the big 4 accounting firms, SOVOS (formerly Fiscal Reps) and TMF Group come to mind. I am sure there are also others operating within this niche.

 

 

The bigger fiscal players have carved out a niche specifically by building and maintaining a global data-base of fiscal and para-fiscal charges. This is not a simple task bearing in mind that tax or other parafiscal charges vary per country (or regionally within certain countries) and per class of business. Additionally, the method and timing of filing and payment may vary (e.g. tied to the insurance period, or upon receipt of premium or even subject to pre-payments). All of this makes forecasting and modelling more challenging for insurance companies, intermediaries or captives without the proper tools to provide accurate, detailed and current information in this respect.

 

 

TMF Group has developed an easy-to-use global insurance tax rate database and calculator which is available to its clients. Captive stakeholders modelling multi-national programmes can forecast tax liabilities on an array of insurance program scenarios when planning, say, their 3-year strategy and roadmap. Continuous updating of the tool guarantees stakeholders have access to the latest information at all times. This makes it a powerful tool for the risk management community.

Conclusion

One of the most famous quotes close to my heart is Henry Ford’s, “If I had asked people what they wanted, they would have said faster horses.” Instead, he created cars.

 

However, there are two caveats to this great adage: Cars are only as good (or safe) as their drivers. They are also unsafe if used for a purpose for which they are not fit. This applies not only to cars but to all tools. The proverb says, “a bad workman blames his tools.” Some tools are useless (or dangerous) in the hands of people who either do not know how to properly use them or do not know what they can achieve with them.  They can, in fact, achieve the opposite by creating a “Jumanji” of regulatory challenges that an insurance company can ill-afford to encounter.

 

In the discipline of risk management, neither insurance nor tax are the problems. The problem is risk. And that is what we seek to better manage through the use of a captives. Tax charges are also part of the landscape of risk, adjunct to the insurance solution a captive  offers. In turn,  tax liabilities need to be well managed to ensure that the captive generates maximum value to its shareholder.  Access to such a tax modelling tool not only helps unravel the tax maze and avoid fiscal non-compliance but also turns risk into opportunity.

James Portelli | 7th Janaury 2021

 

James is a Chartered Insurance Risk Manager holding a senior executive role in an international insurance undertaking, non-executive directorships and Risk Chair on a portfolio of insurance companies operating in or from Malta by virtue of the EU Freedom of Service Directive. James is also a member of the Cutts-Watson Consulting panel and lectures in insurance programmes at the University of Malta. Views expressed are personal and may not be deemed to constitute advice:

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James Portelli CWC

James Portelli

Consultant

A seasoned chartered insurance risk manager with 3 decades of insurance and reinsurance experience in conventional and captive sectors across Europe and the Middle East.
James has been involved in financial services, initially in banking, since 1986 and joining insurance in 1990. 
 
A chartered insurance risk manager, James is a Fellow of the Chartered Insurance Institute and a Fellow of the UK Institute of Risk Management and also holds an MSc in Risk Management from Glasgow Caledonian University. 
 
He started his insurance career with Middlesea Insurance plc (now part of the Grupo Mapfre conglomerate) in Malta later worked in London, Central Europe , the Middle East (Bahrain, UAE and Qatar) and East Africa with a career spanning commercial and industrial insurance underwriting, distribution, outward reinsurance, broking, risk management, captive management, consulting and training.
 
He is now an non-executive director on a portfolio of insurance companies in Malta operating across Europe by virtue of the EU Freedom of Services Directive, is also active in one company in an executive capacity and lectures insurance part-time at the University of Malta. 

James Portelli

Consultant

James Portelli CWC

A seasoned chartered insurance risk manager with 3 decades of insurance and reinsurance experience in conventional and captive sectors across Europe and the Middle East

James has been involved in financial services, initially in banking, since 1986 and joining insurance in 1990. 
 
A chartered insurance risk manager, James is a Fellow of the Chartered Insurance Institute and a Fellow of the UK Institute of Risk Management and also holds an MSc in Risk Management from Glasgow Caledonian University. 
 
He started his insurance career with Middlesea Insurance plc (now part of the Grupo Mapfre conglomerate) in Malta later worked in London, Central Europe , the Middle East (Bahrain, UAE and Qatar) and East Africa with a career spanning commercial and industrial insurance underwriting, distribution, outward reinsurance, broking, risk management, captive management, consulting and training.
 
He is now an non-executive director on a portfolio of insurance companies in Malta operating across Europe by virtue of the EU Freedom of Services Directive, is also active in one company in an executive capacity and lectures insurance part-time at the University of Malta. 

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Dom Wheatley

Consultant

A seasoned captive practitioner and consultant, finance industry experience with over 25 years  world class knowledge.

Exiting Chief Executive of Guernsey Finance, the promotional agency for Guernsey’s finance industry.

His role included business development and the promotion of Guernsey’s finance industry in the Island’s target markets including Europe, the US and the emerging markets, technical research to support promotional activities and liaison with industry associations and government.

Previously Chief Marketing Officer of the Willis Global Captive Practice and Managing Director of its Guernsey business. Over 25 years of finance experience in London and, for the past 19 years in Guernsey.

A member of the Institute of Directors and serve as a non-executive director on a number of local boards. A fellow of the Chartered Insurance Institute and holds an M.B.A from Warwick University.

Dom Wheatley

Consultant

Dominic-Wheatley_CWC_Team

A seasoned captive practitioner and consultant, finance industry experience with over 25 years  world class knowledge.

Exiting Chief Executive of Guernsey Finance, the promotional agency for Guernsey’s finance industry.

His role included business development and the promotion of Guernsey’s finance industry in the Island’s target markets including Europe, the US and the emerging markets, technical research to support promotional activities and liaison with industry associations and government.

Previously Chief Marketing Officer of the Willis Global Captive Practice and Managing Director of its Guernsey business. Over 25 years of finance experience in London and, for the past 19 years in Guernsey.

A member of the Institute of Directors and serve as a non-executive director on a number of local boards. A fellow of the Chartered Insurance Institute and holds an M.B.A from Warwick University.

Ashley-Paxton_CWC_380-450

Ashley Paxton FCA

Project Consultant

Guernsey based chartered accountant with c30 years’ experience spent in practice.

Recently retired as partner and head of Advisory for KPMG in the Channel Islands.

Guernsey based chartered accountant with c30 years’ experience spent in practice.

Unique blend of operational and client experience split between audit and advisory latterly focused on providing transactional support across the insurance, funds, fiduciary and banking sectors as well as local government.

Led a number of high profile and innovative engagements for the States of Guernsey including:

2017 – States bond issue commissioned by the Scrutiny Management Committee
2017 – Guernsey housing market review
2016 – Strategic review of the Guernsey fiduciary industry
2015 – Financial mitigation for milk distributors
2015 – International Capital Flows (funds sector)
Various other confidential engagements

Qualifications
Fellow of the Institute of Chartered Accountants in England and Wales
BSc (Hons) Economics, University of Warwick

Ashley Paxton FCA​

Project Consultant

Ashley-Paxton_CWC_380-450

Guernsey based chartered accountant with c30 years’ experience spent in practice.

Recently retired as partner and head of Advisory for KPMG in the Channel Islands.

Guernsey based chartered accountant with c30 years’ experience spent in practice.

Unique blend of operational and client experience split between audit and advisory latterly focused on providing transactional support across the insurance, funds, fiduciary and banking sectors as well as local government.

Led a number of high profile and innovative engagements for the States of Guernsey including:

2017 – States bond issue commissioned by the Scrutiny Management Committee
2017 – Guernsey housing market review
2016 – Strategic review of the Guernsey fiduciary industry
2015 – Financial mitigation for milk distributors
2015 – International Capital Flows (funds sector)
Various other confidential engagements

Qualifications
Fellow of the Institute of Chartered Accountants in England and Wales
BSc (Hons) Economics, University of Warwick

Graham-Powell_CWCTeam

Graham Powell

Consultant

Graham has spent four decades working in the insurance industry. He has a wealth of experience in all aspects of an insurer’s life cycle including feasibility, formation, management, revalidation and de-risking. In recent years Graham has specialized more on regulatory and compliance work for commercial insurers.

Based in Guernsey, Graham brings his unique skill-set CWC working centrally with the team as it responds to the diverse and ever-changing needs of its clients.

Graham has made his career in the Guernsey finance industry. For more than 35 years he held a senior position at the largest and most innovative captive manager in Europe. As a practitioner, Graham’s own diverse portfolio of clients were accustomed to 1) new ideas and techniques being introduced on a regular basis and 2) no stone being left unturned in the unceasing quest for new lines of business.

As a result of so many years at the “coal face” Graham has a unique insight into every aspect of insurance management. This wealth of experience is now channeled into helping CWC’s clients realise the full potential of their insurers.

Outside of CWC, Graham also acts as an independent director on a number of Guernsey regulated and non-regulated boards of entities for groups operating in a wide range of industries. The owners of these groups range from private individuals to constituents of the FTSE 100.

Graham is a Chartered Insurance Practitioner and a Fellow of the Chartered Insurance Institute by examination. He is registered and approved as a Director with the Guernsey Financial Services Commission.

Graham Powell

Consultant

Graham-Powell_CWCTeam
Graham has spent four decades working in the insurance industry. He has a wealth of experience in all aspects of an insurer’s life cycle including feasibility, formation, management, revalidation and de-risking. In recent years Graham has specialized more on regulatory and compliance work for commercial insurers.

Based in Guernsey, Graham brings his unique skill-set CWC working centrally with the team as it responds to the diverse and ever-changing needs of its clients.

Graham has made his career in the Guernsey finance industry. For more than 35 years he held a senior position at the largest and most innovative captive manager in Europe. As a practitioner, Graham’s own diverse portfolio of clients were accustomed to 1) new ideas and techniques being introduced on a regular basis and 2) no stone being left unturned in the unceasing quest for new lines of business.

As a result of so many years at the “coal face” Graham has a unique insight into every aspect of insurance management. This wealth of experience is now channeled into helping CWC’s clients realise the full potential of their insurers.

Outside of CWC, Graham also acts as an independent director on a number of Guernsey regulated and non-regulated boards of entities for groups operating in a wide range of industries. The owners of these groups range from private individuals to constituents of the FTSE 100.

Graham is a Chartered Insurance Practitioner and a Fellow of the Chartered Insurance Institute by examination. He is registered and approved as a Director with the Guernsey Financial Services Commission.

Paul-Wakefield-CWCTEAM

Paul Wakefield

Consultant

Longstanding experience in on & offshore environments most recently as a Non Executive Director with a London market insurance Company. Experienced in feasibility studies, regulatory matters and the set up of insurance subsidiaries for global multi national corporations.

Paul delivers his own in-depth market knowledge of, and insight into, the captive insurance world.

Paul brings longstanding experience of working in both onshore and offshore environments, most recently as a Non Executive Director with a London market insurance company.

He is also currently a Non Executive Director of a number of Guernsey based insurance companies. He provides CWC clients with further valuable knowledge and a proven track record of strategic and operational consulting.

Paul has undertaken numerous feasibility studies and set up insurance subsidiaries for multi- national corporations across the globe.

As part of the work with captives he has overseen portfolio transfers, novations, redomiciliation of captives, Protected Cell Company formation and the design and implementation of multi-year multi-line reinsurance programmes. He also has undertaken various consultancy work on the regulatory side of insurance.

Paul is an Associate of the Chartered Insurance Institute. He is registered and approved as a Director with the UK Prudential Regulatory Authority and the Guernsey Financial Services Commission.

Paul Wakefield

Consultant

Paul-Wakefield-CWCTEAM
Longstanding experience in on & offshore environments most recently as a Non Executive Director with a London market insurance Company. Experienced in feasibility studies, regulatory matters and the set up of insurance subsidiaries for global multi national corporations.

Paul delivers his own in-depth market knowledge of, and insight into, the captive insurance world.

Paul brings longstanding experience of working in both onshore and offshore environments, most recently as a Non Executive Director with a London market insurance company.

He is also currently a Non Executive Director of a number of Guernsey based insurance companies. He provides CWC clients with further valuable knowledge and a proven track record of strategic and operational consulting.

Paul has undertaken numerous feasibility studies and set up insurance subsidiaries for multi- national corporations across the globe.

As part of the work with captives he has overseen portfolio transfers, novations, redomiciliation of captives, Protected Cell Company formation and the design and implementation of multi-year multi-line reinsurance programmes. He also has undertaken various consultancy work on the regulatory side of insurance.

Paul is an Associate of the Chartered Insurance Institute. He is registered and approved as a Director with the UK Prudential Regulatory Authority and the Guernsey Financial Services Commission.

Niall_Lucas_CWCTeam

Niall Lucas

Consultant

Niall has spent most of his professional career in the captive insurance industry. Holds the ACII, FPC & Chartered Insurer along with various accounting, marketing & computer vocations.

Niall has spent most of his professional career in the captive insurance industry.

He started in Guernsey in 1996, where he provided underwriting support the UK Post Office captive.

During his career, Niall has advised captive stakeholders on underwriting, strategic, operational and governance matters across a broad range of industries and jurisdictions.

He has lead difficult consulting projects requiring innovative thinking, high quality communication skills and perseverance.

Niall has exceptional IT knowledge with highly developed research and analytical skills and qualified as a Chartered Insurer and Financial Planner. These attributes together with his vast captive experience allows Niall to fulfill his role as Chief Operating Officer of CWC.

Niall joined CWC in 2015 to support Malcolm in the development of the company. In 2016 he was promoted to COO as CWC continues to grow.

Niall Lucas

Chief Operating Officer

Niall_Lucas_CWCTeam

Niall has spent most of his professional career in the captive insurance industry. Holds the ACII, FPC & Chartered Insurer along with various accounting, marketing & computer vocations.

Niall has spent most of his professional career in the captive insurance industry.

He started in Guernsey in 1996, where he provided underwriting support the UK Post Office captive.

During his career, Niall has advised captive stakeholders on underwriting, strategic, operational and governance matters across a broad range of industries and jurisdictions.

He has lead difficult consulting projects requiring innovative thinking, high quality communication skills and perseverance.

Niall has exceptional IT knowledge with highly developed research and analytical skills and qualified as a Chartered Insurer and Financial Planner. These attributes together with his vast captive experience allows Niall to fulfill his role as Chief Operating Officer of CWC.

Niall joined CWC in 2015 to support Malcolm in the development of the company. In 2016 he was promoted to COO as CWC continues to grow.

Conor_Jennings_CWC_Team

Conor Jennings

Consultant

Conor Jennings FCII, FIRM, TEP is an insurance and risk management professional of many years’ experience.

He has lived and worked in Ireland, UK, Asia, Guernsey, BVI and more recently in the Cayman Islands.

During this time Conor has managed and directed captive insurance companies for clients ranging from small, family-held businesses to US Fortune 500 companies encompassing a whole host of industries.


Having, most recently, spent over a decade in the Caribbean managing mainly North and South American captive insurance clients Conor leverages his deep global knowledge and skills set to provide creative risk financing solutions to clients from all over the world.

Conor Jennings

Consultant

Conor_Jennings_CWC_Team

Conor Jennings FCII, FIRM, TEP is an insurance and risk management professional of many years’ experience.

He has lived and worked in Ireland, UK, Asia, Guernsey, BVI and more recently in the Cayman Islands

During this time Conor has managed and directed captive insurance companies for clients ranging from small, family-held businesses to US Fortune 500 companies encompassing a whole host of industries.

Having, most recently, spent over a decade in the Caribbean managing mainly North and South American captive insurance clients Conor leverages his deep global knowledge and skills set to provide creative risk financing solutions to clients from all over the world.

Malcolm-Cutts-Watson_CWC

Malcolm Cutts-Watson

Founder & Managing Director

A seasoned captive practitioner and consultant, Malcolm has gathered vast experience over 4 decades working in different domiciles and advising companies and regulatory bodies across the world.

Malcolm Cutts-Watson has spent most of his professional career in the captive insurance industry.

He started in Bermuda in 1982, was in the vanguard of the development of Vermont captive business and then worked in Guernsey. During his career, Malcolm has advised captive stakeholders on strategic, operational and governance matters across a broad range of industries and jurisdictions . He also advises governmental and regulatory bodies on legislative and regulatory change.

He has served, and continues to serve, as a director on a variety of captive insurers and is an approved person in many captive domiciles. He qualified as an accountant in 1982.

Malcolm was a member of the Captive Review Power 50 and in 2015 received the industry’s outstanding contribution by an individual award.

In 2017 he became an inaugural inductee into the Captive Hall of Fame which recognises the most influential figures in the captive industry over the past 50 years.

He has acted as industry partner to AIRMIC’s Captive Special Interest Group. He is a regular contributor to industry debate and is a passionate advocate for the raising of standards in the captive industry.

Malcolm founded CWC in 2015 to allow organisations access to the accumulated knowledge, insight and solutions that he, and the rest of the CWC team of captive insurance experts, have gathered over their lifetimes.

Malcolm Cutts-Watson

Founder & Managing Director

Malcolm-Cutts-Watson_CWC

A seasoned captive practitioner and consultant, Malcolm has gathered vast experience over 4 decades working in different domiciles and advising companies and regulatory bodies across the world.

Malcolm Cutts-Watson has spent most of his professional career in the captive insurance industry.

He started in Bermuda in 1982, was in the vanguard of the development of Vermont captive business and then worked in Guernsey. During his career, Malcolm has advised captive stakeholders on strategic, operational and governance matters across a broad range of industries and jurisdictions . He also advises governmental and regulatory bodies on legislative and regulatory change.

He has served, and continues to serve, as a director as a director on a variety of captive insurers and is an approved person in many captive domiciles. He qualified as an accountant in 1982.

Malcolm was a member of the Captive Review Power 50 and in 2015 received the industry’s outstanding contribution by an individual award.

In 2017 he became an inaugural inductee into the Captive Hall of Fame which recognises the most influential figures in the captive industry over the past 50 years.

He has acted as industry partner to AIRMIC’s Captive Special Interest Group. He is a regular contributor to industry debate and is a passionate advocate for the raising of standards in the captive industry.

Malcolm founded CWC in 2015 to allow organisations access to the accumulated knowledge, insight and solutions that he, and the rest of the CWC team of captive insurance experts, have gathered over their lifetimes.