The EU-driven debate over substance in business activities could strengthen the captive insurance market, according to experts at the recent Guernsey Insurance Forum in London.
Guernsey is Europe’s number one captive jurisdiction and has more than 200 captive insurance companies among more than 850 insurance entities in the sector. It also claimed more than half of the market share of new European captives launched in 2017.
The Base Erosion and Profit Shifting (BEPS) debate has seen jurisdictions take different approaches to how they view business substance. Although captives, and particularly offshore captives, are seen by some to be controversial in this space, BEPS could actually be seen to help the sector, according to Paul Owens, Managing Director of the Global Captive Practice of Willis Towers Watson.
“BEPS is driving what we should be doing,” he said. “Insurance companies should not be a brass plaque on the door with nothing behind it.
“Whether we call them captives, offshore insurance companies, they are real insurance companies and in most cases are set up not for tax purposes but for transfer pricing. There is a very good model out there, experts come together and provide those services.”
Guernsey lawyer Kate Storey, partner at Walkers, said: “This is an opportunity once again to demonstrate that this sector has, and always has had, substance.”
She added: “New substance requirements are not a big deal for Guernsey – we have always been a jurisdiction of substance in insurance. We’ve got 50 years of history in insurance management. Pretty much every international insurer uses an insurance manager in Guernsey, and we employ chartered insurers and the skills all there within the management in Guernsey.”
The panel agreed that the international authorities can take a negative view of captives, and there was a need for education in the sector, including of the tax authorities, a process which is ongoing.
Jenny Coletta, Insurance Tax Partner at EY, specialising in international tax and transfer pricing, said the challenge for the industry was how to present the substance argument, particularly when there was no internationally-agreed definition of the term.
“We are seeing increased tax scrutiny and so having the right governance structure around operations is really important now. The whole focus of tax around substance is being able to demonstrate your behaviour in a commercially-rational manner. It’s about demonstrating the commercial reality of what is happening rather than demonstrating false window dressing.
“Tax should never stand in the way of commercial practice. It’s about reflecting what you are doing, where you are doing it, having that documented and recorded. It’s about documentation and governance.”
Mr English said that the substance debate was something of a “wake up call” for the sector, but Mr Owens added that being able to consistently demonstrate substance would leave the sector in a stronger position and ready to get on with business.
