On 3 July, the Organization for Economic Co-operation and Development (OECD) published a Discussion Draft on the transfer pricing aspects of financial transactions, an extension to its work on Actions 8-10 of the Base Erosion and Profit Shifting (BEPS) Action Plan.
The public consultation on this document runs until 7 September 2018.
The Discussion Draft, which does not yet represent a consensus position of the Committee on Fiscal Affairs or its subsidiary bodies, addresses specific issues related to the pricing of financial transactions, such as: treasury function, intra-group loans, cash pooling, hedging, guarantees and captive insurance.
Section E of the discussion draft, which is dedicated to captive insurance, includes subsections on: the overview of insurance, the rationale for a captive, the existence of insurance, reinsurance captives (fronting), determining the arm’s length price of captives and agency sales. The OECD is seeking answers – in particular – to the following questions:
- When an MNE group member issues insurance policies to other MNE group members, what indicators would be appropriate in seeking to arrive at a threshold for recognising that the policy issuer is actually assuming the risks that it is contractually assuming?
- When an MNE group member issues insurance policies to other MNE group members, what specific risks would need to be assumed by the policy issuer for it to earn an insurance return, and what control functions would be required for these risks to be considered to have been assumed?
- Whether an MNE group member that issues insurance policies to other MNE group members can satisfy the control over risk requirements of Chapter I, in particular in the context of paragraph 1.65, in situations where it outsources its underwriting function. Comments are also invited on whether an example would be helpful to illustrate the effect of outsourcing the underwriting function on the income allocated to the MNE group member that issues insurance policies;
- When an MNE group member that issues insurance policies does not satisfy the control of risk requirements of Chapter I, what would be the effect of this on the allocation of insurance claims, premiums paid and return on premiums invested by that MNE group member?
Insurance Europe response to the OECD Discussion Draft on the Transfer Pricing Aspects of Financial Transactions