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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: OECD Report on the Attribution of Profits: background

International treaties override domestic legislation, as explained at GIM10115. It is therefore of central importance to understand what the treaty language means. This is where the Commentary comes in. Details of the January 2003 OECD Model Convention on Income and on Capital are given at INTM159030+. A lengthy OECD working party produced a report, ‘Report on the Attribution of Profits to Permanent Establishments’. The final version comprising Parts I to IV was published on 7 July 2008. Following a consultation period a revised Article 7 (Business Profits) and Commentary will be published. The principles in the Report, Part IV of which focuses on attribution of profits to insurance establishments, now reflect accepted best practice.

The Report, available on the OECD website, is divided into

  • Part A – Introduction
  • Part B – Functional and Factual Analysis of an Insurance Business
  • Part C – Applying the Authorised OECD Approach to Insurance Companies Operating Through Permanent Establishments
  • Part D – The Future of the Apportionment Approach in Article 7(4)
  • Part E – Co-ordination with Other Articles.Part B contains material on analysing an insurance business which will be helpful in examining group relationships, as well as attributing profits to permanent establishments. It is of importance when applying Part C, as much turns on individual facts and circumstances.

Part C is divided into two steps:

  • Step 1 (GIM10220+), the determination of the activities and conditions of the hypothetical distinct and separate enterprise


* attributing functions, assets and risks
* attributing creditworthiness/solvency margin (limited relevance to insurance)
* attributing assets and investment yield
  • Step 2 (GIM10230), the determination of the profits of the hypothetical distinct and separate enterprise based on a comparability analysis


  • considering the implications of external and internal reinsurance, and other economic relationships (‘dealings’).There are references to the ‘Authorised OECD Approach’, or AOA. This approach, originally referred to as the ‘Working Hypothesis’ is to the application of the 1995 OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations to transactions on the hypothesis that a permanent establishment is a distinct and separate enterprise. This is the ‘independent enterprise’ hypothesis set out in UK tax law at ICTA88/S11AA (2) – see