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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 2: determining the profits of the hypothetical distinct and separate enterprise

Attribution of assets, and investment yield, while key requirements in arriving at profits, are not the only considerations. The second step is to apply, by analogy, the guidance in the OECD Transfer Pricing Guidelines to any economic relationships (‘dealings’) between the permanent establishment and the rest of the enterprise. The Authorised OECD Approach (GIM10210) is to record all income associated with the insured risks accepted by the permanent establishment and the supporting investment assets in the books of the Host State as ‘economic owner’ of the portfolio of risks and supporting assets, and to attribute to it expenses in respect of dealings representing an arm’s length reward for the functions performed by other parts.

Dealings between the permanent establishment and the company of which it forms part need close scrutiny. In the necessary absence of legal documentation, clear evidence would be required to demonstrate that an internal dealing had taken place, and the features relating to it. Internal reinsurance is unlikely to feature, because the risk placing is a primary determinant of placing the key entrepreneurial risk taking (KERT) function itself. No dealing that internally transfers economic ownership of insurance contracts or associated risk will be recognised unless it can be demonstrated that another part of the enterprise has performed the relevant KERT function.

Risk management, as distinct from acceptance, will normally feature as a dealing to be rewarded by an arm’s length fee rather than constitute a KERT function in its own right. In this context, the KERT function may include price-setting and risk retention analysis, but will generally (see below) exclude

  • product management
  • sales and marketing
  • reinsurance (see GIM10231))
  • contract and claims management
  • asset management
  • support functions.INTM463100+ explains how the 5 factors for determining comparability identified by OECD Transfer Pricing Guidelines are applied. The OECD Report on the Attribution of Profits to Permanent Establishments (paragraphs 183 to 191) highlights insurance-specific features.

Central to the analysis is to understand what is meant by the underwriting function. The part of the enterprise which has taken the decision to assume risk at a particular price will be the contracting point with the insured and entitled to the associated underwriting and investment income. Care must be taken in identifying the underwriting functions that constitute active decision taking. In some cases, the risk taking function may be linked with sales and marketing, but ‘rubber stamping’ will not so qualify. The type of business will be relevant, for example travel insurance risk will be accepted by the person who sets the parameters for a program supporting on-line transactions.