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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: OECD Report on the Attribution of Profits: Step 1 - determining the activities and conditions of the hypothetical distinct and separate enterprise:

In arriving at profits attributable to a permanent establishment it is necessary to attribute an investment yield to the attributed assets. Two different approaches are discussed in the OECD Report (GIM10210), ‘top-down’ and ‘bottom-up’.

Top-down approachTo the extent that the amount of investment assets attributable to the permanent establishment exceeds the amount of investment assets actually held in the host country, the excess assets should earn a return equal to the rate of return (having due regard to those assets which do not give rise to income, see

GIM10220) earned on all investment assets held by the company that are not required to be held in trusteed accounts in other countries to support business (‘uncommitted assets’). This may be difficult and use of the rate of return on all investment assets may suffice in many cases. Always the facts and circumstances must be taken into account, for example taking account of underperforming assets or currency inflation.

It may be possible to identify the yield on those categories of the company’s uncommitted investment assets that are most appropriate to associate with the establishment. Currency matching and risk hedging may also be a factor.

Bottom-up approachThis assumes that the rate of return earned on investment assets held by the Host State of the insurance permanent establishment is also earned by the ‘uncommitted’ investment assets attributed to the permanent establishment above the investment assets actually held.

The results of both these approaches necessarily approximate the actual return on free investment assets, and as always flexibility and due regard to the facts and circumstances are needed.