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HMRC internal manual

General Insurance Manual

Non-resident insurers: scope of UK taxing rights: section 11 ICTA & Article 7 OECD Model: attribution of the investment return: OECD Commentary

Article 7 of the OECD Model gives no further rules for determining what the arm’s length amount of excess assets of an insurer might be. Methods (GIM10180) have been devised which although mechanical are designed to test whether the assets appropriated to the branch/permanent establishment are sufficient to meet the separate enterprise hypothesis in Article 7(2). These methods are based on the proposition stated in the General Reinsurance mentioned in GIM10160. They are also justified by reference to the case of Sun Life of Canada v Pearson (1986) 59TC250 (see in particular page 306), and paragraphs 24 and 27 of the Commentary on Article 7 in the 2000 Commentary on the OECD Model. Paragraph 24 of the Commentary says:

“It is usually found that there are, or there can be constructed, adequate accounts for each part or section of an enterprise so that profits and expenses, adjusted as may be necessary, can be allocated to a particular part of the enterprise with a considerable degree of precision. This method of allocation is, it is thought, to be preferred in general wherever it is reasonably practicable to adopt it. There are, however, circumstances in which this may not be the case and paras 2 and 3 [of Article 7] are in no way intended to imply that other methods cannot properly be adopted where appropriate in order to arrive at the profits of a permanent establishment on a “separate enterprise” footing. It may well be, for example, that profits of insurance enterprises can most conveniently be ascertained by special methods of computation, e.g. by applying appropriate coefficients to gross premiums received from policy holders in the country concerned. Again, in the case of a relatively small enterprise operating on both sides of the border between two countries, there may be no proper accounts for the permanent establishment nor means of constructing them. There may, too, be other cases where the affairs of the permanent establishment are so closely bound up with those of the head office that it would be impossible to disentangle them on any strict basis of branch accounts. Where it has been customary in such cases to estimate the arm’s length profit of a permanent establishment by reference to suitable criteria, it may well be reasonable that that method should continue to be followed, notwithstanding that the estimate thus made may not achieve as high a degree of accurate measurement of the profit as adequate accounts. Even where such a course has not been customary, it may, exceptionally, be necessary for practical reasons to estimate the arm’s length profits.”