A cost-efficient answer to BEPS transfer pricing compliance

Threats come in all shapes and sizes. For multinationals with captive subsidiaries, it's now the potential penalty for failure (or the perceived failure) to comply with OECD recommendations aimed at preventing Base Erosion and Profit Shifting (BEPS).

"It's a risk, and there could be consequences", says Thomas Keist, Director and Head of Marketing Innovative Risk Solutions at Swiss Re Corporate Solutions. "If the tax authorities discover something's amiss, they might also look back a number of years in their investigation."

Today, multinationals are being held to ever-more stringent transfer pricing requirements, and sharper scrutiny from tax authorities, prompted by recent scandals involving big names. No longer is it sufficient to simply apply arm's length pricing standards. Multinationals must substantiate they've done so.

According to BEPS compliance recommendations published by the Federation of European Risk Management Associations (FERMA) last June, the way to substantiate is with model-based premium pricing and third-party quotes.

Enter Arm's Length Pricing Quota Share

Our Arm's Length Pricing Quota Share (ALP QS) solution offers an elegant – and cost-effective – way for multinationals with captives acting either as direct or re-insurers to substantiate their compliance with OECD recommendations.   

"We use our expert risk assessment technology to model and quote the risk transferred into a captive programme, and offer to participate with a quota share (QS) on the captive programme at the quoted terms", explains Thomas, adding there are no minimum or maximum percentage thresholds for participation.

We're known for our expertise as a technical underwriter. Premium prices are determined according to hard data, technical modeling encompassing every possible parameter and sophisticated analysis. Furthermore, ALP QS clients receive pricing documentation in a form they can show to tax authorities – at no additional charge.

"We don't ask for fees for our pricing service or for the documention, so ALP QS is an attractive, cost-efficient solution for our clients", says Thomas.

Resting easy – and staying put

This presents a good option for multinationals with captives. They can substantiate technical accuracy of their premiums by way of an independent and credible 3rd party. ALP QS could even provide a simple, inexpensive alternative to one of the more radical 'moves' some have placed on the table, like relocation or closure of the captive.

"A lot of companies have been thinking of onshoring their captives to reduce BEPS risk", says Thomas. "Instead of relocating a captive, they could opt for this service from Swiss Re."

Thus, by entering a standard QS partnership programme, multinationals with captives can gain credibility for their transfer pricing – and BEPS risk management – without paying material charges for technical third-party analysis and the documentation to substantiate it.

The OECD recently issued a discussion draft on how to interpret BEPS guidelines for captive insurers. While we are still in a period where public comment is welcome, the focus of the draft illustrates the OECD's stance that multinationals with captives be able to demonstrate both genuine insurance risk in the captive and comparable pricing.

FERMA guidelines: a framework of consistency for multinationals and tax authorities alike

ALP QS covers all of FERMA's guidelines for BEPS compliance on transfer pricing. Clients receive documentation on how the award-winning Swiss Re Corporate Solutions prices the risk transfer, with transparent descriptions about:

  • pricing methodologies and loss expectations
  • premium compositions, price adequacy and a range of premium levels during the coverage cycle
  • geographic allocation