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BRISBANE, Australia-Australian-owned captive insurers in Singapore are likely to lose the tax-related benefits of the domicile.
Australia may remove Singapore from its "white list," which allows a captive insurer to pay taxes to the domicile rather than Australia. Countries that are deemed to have a tax rate comparable to Australia's are placed on the white list. Singapore's removal from the list would translate to an additional 10% tax for Australian captives domiciled there.
Australian Treasurer Peter Costello has proposed that the change take effect July 1 and has given parent companies and captive managers until March 1 to comment. The proposal is likely to be included in the May budget package and is expected to be passed by Parliament.
Tax experts say the proposal would encourage captive owners to reconsider the viability of Singapore as a domicile, because captives would have to make up the difference between the Singapore tax rate of 26% and the Australian rate of 36%.
Already, one Australian captive owner says the parent company "could consider" shifting the Singapore captive to Bermuda, which is not on the white list either but offers direct access to reinsurers.
Bill Kable, group risk manager and legal counsel for Sydney, Australia-based Metal Manufactures Ltd., said the proposal, if it went ahead, could create administrative problems because its Singapore captive, Castle Pacific Ins. Pte. Ltd. writes New Zealand and Asian business as well as Australian. "Singapore's advantage is it is close in time and travel, but Bermuda has a highly developed insurance market," he said.
However, Mr. Kable added he had "not yet delved into" the proposal. Metal Manufactures' captive underwent a four-year audit by the Australia Tax Office, or ATO, but last year was found in full compliance with the tax laws.
Captives are "an integral part of our insurance program," not a vehicle for tax advantages, said Ian Wildish, general manager of global risks with Melbourne, Australia-based Mayne Nickless Ltd., which has health care, transportation and security-related business.
Mr. Wildish, who joined Mayne Nickless late last year, is reviewing the company's insurance programs and captives in Singapore and Bermuda. He said the proposed tax changes would be considered as part of the review.
Under Australia's Controlled Foreign Corporation tax rules, introduced in 1990, income earned by Australian-owned companies operating in "white list" countries is exempt from tax in Australia, providing tax is paid at the full corporate rate to the white list country. The 60 white list countries, including Singapore and Malaysia, are deemed by the ATO to have tax rates comparable to Australia. Singapore isn't the only white list country that is likely to lose its status. The Australian government is trimming the list in order to increase tax revenue and reduce administration associated with the list.
Australian-owned, foreign-based corporations always have had the option to pay full corporate tax in Australia instead, and some publicly listed companies do so because they can then obtain tax credits for shareholders, said Peter Kennedy, taxation partner with the Melbourne office of accounting firm Deloitte Touche Tohmatsu.
Under Australia's tax laws, shareholders receive credit for income tax paid by companies in the form of "franked dividends." Shareholders are not taxed on franked dividends, as the company already has paid tax, thus ensuring corporate profits are not double-taxed.
Mr. Kennedy said the Singapore government requires captives to pay only 10% tax, but when Australia first began taxing income from foreign-based subsidiaries in 1987, the Singapore government, after lobbying from captive owners and managers, introduced a program by which Australian-owned captives could elect to pay the full corporate rate in Singapore.
Sydney-based construction company CSR Ltd. has a Singapore captive, but it is one of the few that will be unaffected by the proposed changes because it continues to pay only 10% tax in Singapore and 26% in Australia, thus allowing shareholders access to more franked dividends.
Mr. Kennedy said the decision to pay 26% tax in Singapore was irrevocable, but he expects captive owners and managers may again lobby the Singapore government for change, if the CFC tax law is changed.
"Captive owners may now seriously consider the future of their captives," Mr. Kennedy said. "With so many other countries off the white list, if an owner is going to shift a captive's base, they may as well come to Australia."
But captive owners and managers say Australia's regulatory authority, the Insurance & Superannuation Commission, will not make sufficient concessions to attract onshore captives-they must be capitalized to the same minimum levels as all non-life insurers, even if they write no third-party business-and many owners therefore are reluctant to move their captives to Australia.
And Mr. Kennedy added that the tax change alone would be unlikely to make a captive owner shift domicile, as most had chosen Singapore for other reasons, including the fact that there are experienced captive managers based there.
While some Singapore captive managers were unaware of the Australian government's proposals, or had not yet studied them, Sedgwick Management Services (Singapore) Pte. Ltd., already has approached the Singapore government's Monetary Authority, or MAS, which regulates captives. Sedgwick is the largest manager in Singapore, with 21 captives, of which 18 have Australian parents.
George Tarabaras, director and general manager, said the proposed change meant the ATO would not distinguish between Singapore and tax havens, which may encourage some captives to move to tax havens.
He said that is "not the way to treat a major trading partner," and he has asked the MAS to negotiate on a government-to-government basis.
"No doubt the MAS is concerned as this is a challenge to Singapore as a domicile and could impair Singapore's ability to attract new captives," he noted.
But Mr. Tarabaras said it is "just another headache" for parent companies and, because tax advantages were not the motivating factor in establishing their captives, it is simply a bonus they would no longer enjoy.
He noted, however, that issues such as the way IBNR reserves were to be calculated in assessing profit levels were not clear. "Will the ATO accept calculations according to the current principles, or expect recalculations according to Australian principles? The current method, which is acceptable to the Singapore government, may not be acceptable to the Australian authorities."
Despite potential removal of the tax benefit in Singapore, Mr. Tarabaras said Australian captives are unlikely to go onshore because of the regulatory disadvantages.
Mr. Tarabaras said he is talking to tax and legal advisers and has not yet decided whether to put a submission in by the March 1 deadline.
George McGhie, manager, global risk management with Johnson & Higgins Risk Management Services (S) Pte. Ltd., said tax is a secondary issue in the establishment of captives, so he did not expect many parent companies to be concerned. J&H manages two Australian-owned captives.