In order to consider the transfer pricing implications of a transaction with a captive insurance, it is first necessary to identify the commercial or financial relations between the associated enterprises and the conditions and economically relevant circumstances attaching to those relations in order that the actual transaction is accurately delineated. The initial question will therefore be whether the transaction under consideration is one of insurance, as defined above. This analysis requires consideration of whether the risk has been assumed by the insurer and whether risk diversification has been achieved.
TPG2022 Chapter X paragraph 10.200
Category: E. Captive insurance, TPG2022 Chapter X: Transfer pricing aspects of financial transactions | Tag: Accurate delineation, Actual transaction, Captive insurance, Financial transactions, Genuine insurance, Group insurance, Risk diversification, Self insurance
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- TPG2022 Chapter X paragraph 10.201Insurance requires the assumption of insurance risk by the insurer. In the event of a claim, the insured does not suffer the financial impact of a potential economic loss to the extent that insurance risk has been assumed by the insurer, because the...
- TPG2022 Chapter X paragraph 10.199A frequent concern when considering the transfer pricing of captive insurance transactions is whether the transaction concerned is genuinely one of insurance, i.e. whether a risk exists and, if so, whether it is allocated to the captive insurance in light of the facts...
- TPG2022 Chapter X paragraph 10.208In situations where the captive insurance lacks the scale to achieve significant risk diversification or lacks sufficient reserves to meet additional risks represented by the relatively less diversified portfolio of the MNE group, the accurate delineation of the actual transaction may indicate that...
- TPG2022 Chapter X paragraph 10.198Captive insurances may be self-managed from within the MNE group, or managed by an unrelated service provider (often a division of a large insurance broker). Typically this management would include ensuring compliance with local law, issuing policy documents, collecting premiums, paying claims, preparing...
- TPG2022 Chapter X paragraph 10.192Captive insurances may be subject to regulation in the same way as other insurance and reinsurance companies. The precise requirements of insurance regulation will vary from one jurisdiction to the next but typically include certain actuarial, accounting and capital requirements. While insurance regulation...
- TPG2022 Chapter X paragraph 10.190In this guidance, the term captive insurance is intended to refer to an insurance undertaking or entity substantially all of whose insurance business is to provide insurance policies for risks of entities of the MNE group to which it belongs....
Related Case Law
- St. Vincent & the Grenadines vs Unicomer (St. Vincent) Ltd., April 2021, Supreme Court, Case No SVGHCV2019/0001Unicomer (St. Vincent) Ltd. is engaged in the business of selling household furniture and appliances. In FY 2013 and 2014 Unicomer entered into an “insurance arrangement” involving an unrelated party, United insurance, and a related party, Canterbury. According to the tax authorities United...