Companies need to be increasingly vigilant in complying with regulatory, tax and legal compliance across the full scope of their jurisdictional footprint, according to Martin Le Pelley, compliance director for Heritage Insurance Management.
As the compliance director for Heritage Insurance Management, I come across issues which our international client base face every day in relation to managing the risk of non-compliance with regulatory, tax and legal requirements across the variety of jurisdictions in which our clients have insurable risks. Alongside the traditional challenges of ensuring that the insurance cover ad equately addresses the risk management needs of the international group, and the local operational needs of the trading subsidiary, there are a whole host of regulatory compliance matters to consider.
These include the admissibility of insurance when provided by a non-local insurer; the liability to insurance premium tax (and whether this is a liability of the insured or the insurer); and the validity of the insurance if the insurer is not registered in the territory of the subsidiary, or directly insuring the subsidiary. At the recent Captive Live seminar, which covered this topic, several presenters, myself included, highlighted some of the challenges and risks facing international businesses and ways to address these risks.
Many international companies use captive insurers, based in Guernsey or other non-EU jurisdictions, to manage their group risks in a cost-effective and centralized way. This will usually involve the company's broker arranging the cover, and many risk managers rely on the broker, as well as the insurance manager, to ensure that compliance is addressed as part of the programme placement.
The captive insurance manager is primarily responsible for the smooth running of the captive, but will also be responsible for the compliance by the captive with local insurance legislation. In Guernsey this means the insurance manager will monitor and report on compliance with the Insurance Business (Bailiwick of Guernsey) Law, 2002, together with the related rules, regulations and codes. This, in itself, is a challenge as the rules and regulations are amended to take into consideration latest international best practice. However, the adherence by the captive to the home regulator's rulebook is only a part of the challenge when it comes to monitoring international compliance.
There is also a requirement for the captive's board, and insurance manager, to ensure the captive is complying with all the appropriate regulations and legislation in those territories in which it is insuring risks of the captive's parent.
As an example, a Guernsey-based captive which is owned by an international financial services company, and which is providing Professional Indemnity (PI) insurance to the subsidiary companies within the group operating in Europe, may find that it faces different challenges depending on the European country in which the subsidiaries are based. The direct provision of PI cover from a Guernsey captive to a UK company is permitted as "non-admitted" business, which means that the insurer does not need UK FSA authorization in order to cover risks located in the UK.
The same would not be the case for employers' liability or motor business, as these are compulsory covers requiring a UK authorised insurer to provide the cover. On the other hand, France, Ireland, Spain and Switzerland, among others, do not allow non-admitted insurance from outside the EU, with certain exceptions. This means that a Guernsey captive must be careful to ensure that providing insurance to cover the risks of European subsidiaries is not illegal.
Parent purchasing insurance on behalf of subsidiaries
At the Captive Live seminar, we considered whether it might be possible for the captive's UK parent to buy the insurance cover on behalf of its subsidiaries, so that it wouldn't fall foul of the non-admitted status of the insurance cover in the various jurisdictions in which its subsidiaries are operating.
This gives rise to two issues. Firstly, does the UK parent, as a separate legal entity to its subsidiaries, have exposure to the risk of loss facing its subsidiaries, such that it can validly buy insurance for this exposure? Secondly, even if it does have this exposure (perhaps by being exposed to the loss by virtue of the parent company's investment in its subsidiary in the event of a loss), does this actually achieve the requirements of the subsidiary in relation to its risks? In effect, the subsidiary is uninsured, and the board of the subsidiary would be at risk of a corporate governance failure by relying on the insurance of the parent, which may not satisfy local, legal or regulatory requirements. It may be possible to structure the insurance programme so that the insured entity is located in a jurisdiction which allows non-admitted insurance, thereby avoiding the provision of a policy of insurance directly to a foreign subsidiary in a jurisdiction where non-admitted insurance is prohibited. For instance, the parent company could own the property, plant and equipment, which is used by the subsidiary and needs to be insured.
However, this does not necessarily solve the problem as there may still be insurable risks located in foreign jurisdictions, which will give rise to either an Insurance Premium Tax (IPT) liability or a requirement to register. An example of this may be a UK retailer with shops in Ireland, where the insurance is provided to the UK company, but the insurable risk is located in Ireland. In this situation, it will be necessary to ensure that, even if the non admitted policy is with a UK company, the Irish insurance premium tax (IPT) arising on the premium allocated to the Irish insurable risk is properly accounted for.
Non-registration for, and non-payment of IPT will likely be viewed in a dim light by the tax authorities in the jurisdiction in which the subsidiary is located, especially given the prominence which the UK and other EU member states are giving to tax avoidance by multi-national groups.
Tackling tax, legal and regulatory hurdles
How, then, can a risk manager of such a group address the multitude of tax, legal and regulatory hurdles which arise in relation to the management of insurance cover applying to the group's subsidiaries? It may not be sufficient for the risk manager, or indeed the captive's board or manager, to rely on the group's broker to deal with the collection and payment of IPT, as the burden for the collection varies between the insured and insurer depending on the jurisdiction. Furthermore, the broker may not have a contractual obligation to settle the IPT, nor would they be liable for any fine imposed on the insurer for non-payment in the event that the incorrect amount of tax was paid.
In the case of IPT, which is generally a tax on the insurance premiums associated with cover applying to risks within a particular jurisdiction, there are specialized service providers that can advise on the correct accounting treatment for the registration for, collection of, and payment of IPT. Even if a company or its insurer has properly registered and is accounting for its IPT liabilities, this does not mean that it is completely out of the woods, as countries regularly change their IPT rates, while others impose new IPT levies. Our seminar considered the case of Hungary, in which IPT has just been imposed. The problems associated with this jurisdiction are not in relation to the amount of, or the liability for paying the tax, but with the process by which an insurer can register and actually remit the tax, as the Hungarian Governments' systems appear to be incapable of managing the process of collecting the revenue.
In the case of Value Added Tax (VAT), which is also an indirect tax, but is payable not on insurance premiums, but on services provided to the insurer (e.g. claims management services), the basis on which it is charged changed in 2010 following the implementation of the EU Directive on VAT, which required all service providers in the EU to charge VAT at the rate applicable in the customer's jurisdiction. This caused problems with systems that had been set up to charge VAT at the rate applicable in the supplier's jurisdiction (if the rates were different) and there are still many suppliers who do not appreciate the impact of the changes when providing services cross-border.
Penalties for non-compliance
What are the penalties for non-compliance? We discussed at the seminar whether it would be "worth the risk" for
insurers to either wittingly or unwittingly ignore the risks associated with becoming an admitted insurer and/or registering for and paying IPT in the various jurisdictions in which they were insuring risks – especially in light of the ever-changing regulatory and fiscal environment within the EU and beyond. In terms of the admitted versus non admitted position, this may well vary depending on the nature and availability of the insurance cover. While some jurisdictions are more relaxed than others, it would seem prudent to obtain advice from a regulatory specialist or even from the regulator itself in the jurisdiction before writing direct business on a non-admitted basis, in order to mitigate the risk of a regulatory breach. We suggested that, to be absolutely on the safe side, captives might consider using a fronting insurer with authorization in the territories in which the risks are located, to mitigate the regulatory risk, assuming such fronting cover can be obtained at a cost-effective price.
The position with tax is more sensitive, as almost all governments are clamping down on both tax evasion and tax avoidance such that ignorance is no defence.
Furthermore, the imposition of fines is becoming more common, as is the reputational damage caused by multi-national companies being seen to act in a morally corrupt fashion. It is for this reason that Starbucks voluntarily paid £20m to the UK HMRC following revelations that it had reduced its UK corporation tax bill to nil by paying licensing and franchise fees for the use of brands and intellectual property to subsidiaries in lower tax jurisdictions.
It wasn't necessarily illegal, just unpalatable to Starbucks' customers. Various initiatives are underway to help risk managers find a way through the minefield, and there are a number of specialist compliance service providers who can assist. However, each company will face different issues, such that there is not necessarily any easy solution to these problems, but just being aware of the risks is a key first step to addressing them – as any good risk manager will know!
Originally published by Captive Review, April 2013
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