Share this article
BEPS and DAC
On 4th January 2021, the Commissioner for Revenue in Malta issued the ‘Guidelines on the Mandatory Automatic Exchange of Information in relation to Cross-Border Arrangements’ (Article 96(2) of the Income Tax Act (Chapter 123 of the Laws of Malta; S.L 123.127):
These directives emanated from the EU Council Directive 2011/16 (‘Directive on Administrative Cooperation’ or ‘DAC’) as amended in May 2018 by the EU Council Directive 2018/822, referred to as DAC 6. These are a natural progression from the 2015 OECD project on Base Erosion and Profit Shifting (BEPS). DAC 6 is arguably EU’s targeted action towards automatic exchange of tax information. The objective is to bolster tax transparency and attack harmful tax practices in cross-border arrangements.
Understandably, captive insurance companies globally, their ultimate beneficiary owners and captive domiciles have been discussing the implications of BEPS since well before the introduction of the EU Directives of 2016 and 2018, and which are being gradually transposed into respective local law within EU member states.
Why, or in which instances, would DAC 6 be of concern or interest to captives?
CUP and DAC
Transfer pricing is arguably at the top of the international tax agenda. The ‘Comparable Uncontrolled Price’ when applied to captives touches upon issues relating to the provision of insurance or ‘cash-pooling’ (which broadly falls under the provision of a loan/guarantee or other financial transactions and intra-group services) or on the provision of other intra-group services (e.g. IT, HR, legal, finance etc.).
In February 2020 OECD released a report on ‘Transfer Pricing Guidance on Financial Transactions’ and chapter 5 of this report deals specifically with captive insurance arrangements and transfer pricing.
The OECD report raises a justification for captives that is unrelated to tax. The prime objective of a captive is to manage intra-group risks in a more economically feasible way than that provided by the conventional insurance market. Tactical advantage may also be derived through the application of captives as a result of cross-border regulatory and fiscal arbitrage (such as accessing outward reinsurance or retrocession, mitigating volatility in premium, deductible levels or differences in policy limits or conditions). However, from a corporate governance perspective, it may be a well-worth exercise for a captive board to ask itself a set of due diligence questions so as not fall foul of this legislation. Some questions immediately come to mind and these are listed under ‘Captive Considerations’ below. Another worthy exercise would be to scrutinise all agreements or interactions within the group under an internal regulatory spotlight.
From an insurance perspective, perhaps what one needs to define is what constitutes (and whether we fall under these definitions):
1. A promoter/intermediary/service provider; and
2. A reportable arrangement
According to the EU Directive the term:
1. “promoter,” is an intermediary who, “designs, markets, organizes or makes available for implementation or manages the implementation of a reportable cross-border arrangement” and
2. “service provider,” is an intermediary who, “knows or could be reasonably expected to know that they have undertaken to provide aid, assistance or advice with respect to a reportable cross-border arrangement.”
3. Reportable arrangements/situations may include:
a. reinsurance transactions with low tax jurisdictions
b. insurance portfolio transfers with different considerations
c. cross-border asset liability management arrangements
d. cross-border life-insurance schemes with tax deferral in exit taxes.
It is worth emphasizing that the term ‘intermediary’ within this context has a completely different interpretation and is unrelated to the meaning of an ‘intermediary’ as defined and regulated under various insurance legislation worldwide. Therefore, within this context, an insurance company (including a captive insurance company) can be an ‘intermediary’ if it is a ‘promoter’ or ‘service provider’ of a ‘reportable arrangement’.
Put simply, for example, a captive insurance company supplying intra-group insurance and/or purchasing reinsurance from within the group would be an ‘intermediary’ for the scope of DAC 6. Within the context of companies in Malta, example 3 under 2.4.3 of the CfR guidelines (Malta, 4th January 2021) specifically highlights this.
If its activities fall within pre-defined cross-border reportable arrangements or ‘hallmarks’ (whether within the EU or with 3rd-country entities), then the captive insurer, as an ‘intermediary’ is obliged to report these. A typical reportable arrangement or hallmark would be one that is specifically aimed at exploiting a tax advantage.
Guidelines state that, irrespective of the tax residence of parties to a reportable cross-border arrangement, a person falling within the definition of an intermediary will have an obligation to file information with the respective revenue authorities only where such person has a ‘nexus’ within the country. For the purpose of establishing ‘nexus’, the intermediary needs to satisfy at least one of the following conditions:
1. Residence for tax purposes;
2. Permanent establishment through which the services are being provided;
3. An entity incorporated within the country, or governed by the its laws;
Registration with a professional association related to legal, taxation or consultancy services in the country.
From an internal due diligence perspective, it might be pertinent for captive insurance company boards to ask themselves the following, when examining whether it falls within an ‘intermediary’ category or whether an action is a ‘reportable arrangement’:
1. Is the captive insurance company providing a pooling and further risk-transfer/diversification service? Is this service providing tangible economic benefit (other than fiscal benefits) to its internal client(s)? Is the economic capital position of the parent or other internal entities improving as a result this economic benefit?
2. Are the captive and its reinsurers all regulated undertakings with substantively similar regulatory regimes vis-à-vis solvency and capital adequacy and disclosure requirements?
3. Are the risks insured by the captive, ones that are generally insurable by the conventional market? A negative answer to this question may give rise to a discussion along the lines that certain captives have been established specifically to address gaps in the conventional market’s offering. However, provided that one can substantively prove the technical validity of the pricing of the insurance cover being offered, then this question should not pose a problem.
4. Does the captive insurance company run a real risk of suffering losses?
5. Is the pricing of captive products more or less in line with what its clients would be charged in the conventional market for the same level of insurance cover or policy limits? Some may argue that, for example, lower acquisition or operating costs for a captive may, in theory, justify lower premiums. From a transfer pricing perspective, a risk may exist if the inverse was true, i.e. higher premiums than the conventional market would charge are transferred to the captive and so not commensurate to the risk being insure.
6. If the insurance company provides insurance to third parties adjunct to a product offered by another company within the group (such as auto or technology-related warranty and extended warranty products, GAP etc.), how does its pricing benchmark against conventional competitors?
7. Is the captive an entirely ‘managed concern’ or a ‘brass-plate’ or is it in control of, for example, the decision-making (and oversight) of risk acceptance/treatment and of other controlled functions?
A brushstroke conclusion for captives established with the core objective of providing insurance solutions to group companies (or their clients) is that they need not be too concerned about the implications or falling foul of DAC 6 and similar legislation as they are aimed at bolstering fiscal accountability and transparency. The integrity created through properly established, run, governed and independently audited captives generally speak for itself. Captive boards may wish to appoint an independent consultant to provide assurance that policies, processes and controls are in place to deliver that integrity.
James Portelli | 15th January 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:
Cutts-Watson Consulting Limited
Cercle de Pierre, La Grande Rue,
St Saviour, Guernsey, GY7 9PS
+44(0) 7781 135 628 malcolm@cuttswatson.com
Co. Reg. No. 60168 | © CWC 2021. All rights reserved.
Cutts-Watson Consulting Limited
Co. Reg. No.60168
Cercle de Pierre, La Grande Rue, St Saviour, Guernsey, GY7 9PS
Cutts-Watson Consulting Limited
Co. Reg. No.60168
Cercle de Pierre, La Grande Rue, St Saviour, Guernsey, GY7 9PS
+44(0) 7781 135 628 cwc@cuttswatson.com
You have successfully registered for the Regenesis Boardroom Analysis. You can now follow the link below and take the analysis and receive the instant results. You will need your email address and the pin number shown below.
Pin Number: 2145
To continue to offer, or to create, a compelling and competitive captive offering, domicile authorities need to understand the global captive marketplace, changing stakeholder demands and threats or opportunities for the business. It can be a challenge for these bodies to be able to access independent, insightful advice upon which to base their strategic planning and resource allocation.
Examples of CWC services for Industry Engagement:
To continue to offer, or to create, a compelling and competitive captive offering, domicile authorities need to understand the global captive marketplace, changing stakeholder demands and threats or opportunities for the business. It can be a challenge for these bodies to be able to access independent, insightful advice upon which to base their strategic planning and resource allocation.
Examples of CWC services for Short Term Consignment:
To continue to offer, or to create, a compelling and competitive captive offering, domicile authorities need to understand the global captive marketplace, changing stakeholder demands and threats or opportunities for the business. It can be a challenge for these bodies to be able to access independent, insightful advice upon which to base their strategic planning and resource allocation.
Examples of CWC Consultant held Non-Executive Directorships:
The Board, and individual Board Members, face a growing array of stakeholders’ scrutiny whilst directing a captive or SME insurer. Increasingly, they are looking to external independent counsel to ensure, and provide evidence, that they are a high performing and soundly governed caucus.
Our Products:
As part of our commitment to develop the talent in the captive industry, we host various educational events. Recent examples include the 2015 UK Insurance Act and management of assets in a Solvency II world.
We also run an Advanced Captive Training programme as we have identified there is little structured educational resource in the industry beyond introductory courses.
Our consultants are frequent speakers at industry events covering technical topics as well as offering their outlook on the current and future captive landscape.
To continue to offer, or to create, a compelling and competitive captive offering, domicile authorities need to understand the global captive marketplace, changing stakeholder demands and threats or opportunities for the business. It can be a challenge for these bodies to be able to access independent, insightful advice upon which to base their strategic planning and resource allocation.
Examples of CWC services for Domicile Regulators & Promotional Agencies:
The market typically interacts with a captive in the following ways:
In all situations (re)insurance industry stakeholders should interact with the captive on the same terms as they would with any other market participant yet recognising the unique characteristics of the captive arrangement.
Examples of CWC services for Insurers & Reinsurers:
Download the Brochure :
Coming Soon
Download the Brochure :
Coming Soon
Download the Brochure :
Coming Soon
Examples of CWC services for Service Providers:
We maintain close links with captive industry globally and so are able to guide you through market dynamics, culture & accepted practice, trends and emerging developments. Our extensive network of contacts ensures honest feedback and access to key influencers and decision makers in the domiciles.
We can contribute to your marketing and sales planning and facilitate product launches, or simply be a sounding board for your ideas.
Examples of CWC services for Captive Owners:
CWC Products for Captive Owners:
Captive Strategic Review
Captive Feasibility Study
Captive Health Check
Examples of CWC services for Captive Managers:
Examples of CWC services for Captive Managers:
Our CWC Products designed for Captive Managers:
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.
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.
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
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
Based in Guernsey, Graham brings his unique skill set to CWC working centrally with the team as it responds to the diverse and ever-changing needs of its clients.
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.
This in-depth knowledge came into its own when CWC was commissioned to carry out a strategic review of the Guernsey insurance sector by the States of Guernsey. Graham acted as the project manager for this major piece of work.
Outside of CWC, Graham acts as an independent non-executive director on a number of Guernsey (re)insurers for groups operating in a wide range of industries. The owners of these entities range from private individuals to constituents of the FTSE 100 and Nasdaq.
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.
Based in Guernsey, Graham brings his unique skill set to CWC working centrally with the team as it responds to the diverse and ever-changing needs of its clients.
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.
This in-depth knowledge came into its own when CWC was commissioned to carry out a strategic review of the Guernsey insurance sector by the States of Guernsey. Graham acted as the project manager for this major piece of work.
Outside of CWC, Graham acts as an independent non-executive director on a number of Guernsey (re)insurers for groups operating in a wide range of industries. The owners of these entities range from private individuals to constituents of the FTSE 100 and Nasdaq.
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 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 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 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 marketing and up to date IT knowledge with highly developed research and analytical skills. He qualified as a Chartered Insurer and Financial Planner. These attributes together with his vast captive experience allows Niall to fulfil 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 and continues to support CWC as it holds its place as the global Captive Consultants of choice.
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 marketing & up to date IT knowledge with highly developed research and analytical skills. He qualified as a Chartered Insurer and Financial Planner. These attributes together with his vast captive experience allows Niall to fulfil 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 and continues to support CWC as it holds its position in the industry as the global Captive Consultants of choice.
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.
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 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 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.
