Non-resident insurers: scope of UK taxing rights: section 11 ICTA & Article 7 OECD Model: OECD Report on the Attribution of Profits: Step 1
- determining the activities and conditions of the hypothetical distinct and separate enterprise: the key entrepreneurial risk taking function
The central concept here is the ‘key entrepreneurial risk taking function’, or KERT function This is the function likely to affect most directly the profitability of the enterprise, requiring active decision making and the assumption or management of risk. For an insurance enterprise, it is the assumption of risk rather than its management which is the focus. Once a location performing the risk assumption function has been determined and the appropriate risk attributed to it, it is necessary to attribute an appropriate amount of assets to that location to back that risk, assets representing both provisions and also surplus or capital (‘free assets’ in the language of SI2003/2714 - see GIM10123).
The emphasis is on looking at where people are genuinely assuming risk and performing the key risk-taking functions – the substance rather than form, which can be supported by tangible evidence of the reality, rather than, for example, sending contracts for formal approval when the core decision making work is performed elsewhere.
Other economic relationships - ‘dealings’ – may be significant; there is no presumption that these are by nature of low value and this is where the functional and factual analysis is important. But the attribution of investment assets to the permanent establishment to support its insurance risk is central. Unlike banking, for insurance activity there is no international standard similar to the Basel Accord for determining the amount of provisions in relation to risks or the amount of surplus needed to absorb shocks. Both regulatory and tax rules vary widely internationally. However, there is reasonable convergence between systems viewing provisions and surplus together. Hence the focus of the Report is on insurance risk assumed with no attempt to distinguish further.