Companies with offshore captives ignore forthcoming OECD measures at their peril, says Malcolm Finney.
It is probably fair to say that most of the world's captives are located in the world's tax havens or, perhaps more politically correct, offshore financial centres. Most "high tax" territories (including the UK) look with disfavour on such countries. This is why the UK introduced its controlled foreign companies legislation in 1984 and why many other countries have introduced equivalent rules.
However, it is not only countries acting in isolation that are attacking tax haven operations. Increasingly, international bodies are acting, bodies such as the Organisation for Economic Cooperation and Development (OECD), the Financial Action Task Force, the Financial Stability Forum and the European Union.
In its Report on Progress in Identifying and Eliminating Harmful Tax Practices this year, OECD highlighted six tax havens which it categorised as "cooperative". These were Bermuda, Cayman Islands, Cyprus, Malta, Mauritius and San Marino. None of these are likely to be subject to the anti-tax haven measures which may be introduced in the future by the various OECD members.
Some 35 other identified tax havens are likely to be labelled "uncooperative". They include Barbados, the BVI, Cook Islands, Guernsey, Isle of Man, Jersey, Liechtenstein, and Turks and Caicos. The deadline for deciding which tag to attach - cooperative or uncooperative - to territories identified as tax havens is 31 July, 2001, when OECD publishes its official List of Uncooperative Tax Havens.
What will be the effect for offshore-located captives? The bottom line is that a failure on the part of an identified tax haven to agree to curb perceived "harmful tax practices" will cause it to become the target of what the OECD refers to as "defensive measures". These could include:
For UK-owned captives, defensive measures could result in the levying of UK withholding taxes on insurance premium payments to captive subsidiaries in these havens (currently not leviable). Perhaps more importantly, they could mean the disallowance as a corporate tax deduction of such payments. Both, certainly the latter, might well spell the demise of the UK -owned offshore captive. Possible termination of existing double tax treaties, say, for example, those with Guernsey, Isle of Man or Jersey might have less impact but should not be underestimated.
UK-owned offshore captives located in uncooperative tax havens could be significantly worse off than at present or than if the captive was located in a cooperative tax haven. As, at present, Guernsey, Isle of Man and Jersey are all rated as uncooperative, the possible implementation of some of the above measures could prove a disaster for them.
Is it time to move to "safer" climes? Probably not. Such a step seems a little premature, despite the draconian effect of some of the possible measures mentioned. The current OECD deadline for tax havens to change their practices and become cooperative is 31 December 2005. Athough five years may not be that far away, it gives sufficient time for modifying the current ways of ranking tax havens and for possible defensive measures.
OECD is intent on forcing tax havens to modify their approach. And other international bodies, while they may disagree on how tax havens are ranked, have similar views. Inevitably, the UK tax position of some UK owned offshore captives will be affected.
Malcolm Finney is an international tax consultant, e-mail: email@example.com . He is author of "Captive Insurance Companies A UK Tax and Financial Analysis", price £275 or £225 to AIRMIC members, published by Management Dynamics, Tel: 01727 863701.