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HMRC internal manual

General Insurance Manual

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HM Revenue & Customs
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Non-resident insurers: scope of UK taxing rights: section 11 ICTA & Article 7 OECD Model: attribution of the investment return: traditional Methods 1 and 2

Two main methods have customarily been employed in attributing the investment return to non-resident general insurers.

Method 1(UK Technical provisions/World wide technical provisions) x (World wide investment return)

Method 2([UK technical provisions + solvency margin + ‘comfort margin’]/World wide assets) x (World wide investment return)

These methods may not be fully compatible with the separate enterprise principle in Article 7(2) of the OECD Model. Arguably Method 1, in apportioning worldwide yield in the ratio of UK technical provisions to the world technical provisions attributes income on shareholders’ funds that would not be available to the establishment were it a separate entity. However, if the activities of the permanent establishment and of the rest of the enterprise are homogeneous, Method 1 may give a reasonable arm’s length result, assuming the national regulatory requirements involved are similar. Otherwise adaptation may be required.

Method 2 arguably seeks to confer some attributes of a separate company with its own share capital and reserves upon a permanent establishment. The hypothesis in Article 7(2) does not say that the branch is deemed to be a separate company (and therefore must have a share capital). But an enterprise looked at on a stand alone basis would in general need capital in some form. A partnership or Lloyd’s syndicate needs to be capitalised although not in the form of share capital.

Whatever the justification, by reference to General Reinsurance v Tomlinson, or the OECD Model Commentary in the light of these arguments, the actual circumstances of the branch activities must always be considered. Any total transfer of cash-flow, as it arrives, to Head Office would for example clearly be a ’dealing’ with the enterprise of which the branch is a permanent establishment, and not one that would exist at arm’s length. It is perhaps less obvious that an initial under funding of a branch by its Head Office is. The existence of the first situation clearly justifies the attribution of investment yield to the branch above what is shown in the branch books or regulatory return.

Attributed investment yield is not ’notional’ investment income. It is real, but has not been attributed by the company to its branch. On this analysis it might seem impossible to attribute to a UK branch more than the total investment return of the company as a whole, but where there are investment gains and losses this is a possibility. If the entity of which the UK branch forms part has had insufficient investment return attributed to it as a result of non- arm’s length dealings with other members of a group Article 9 of the OECD Model (Associated Enterprises) and possibly ICTA88/SCH28AA may be in point (see INTM430000+).

Methods 1 and 2 should now be seen as simplified applications of the approaches discussed in the OECD Report on the Attribution of Profits to Permanent Establishments. They may give a reasonable result in some circumstances. See GIM10210+.