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HMRC internal manual

International Manual

Profits attributable to a permanent establishment of a UK resident company - TIOPA10/S43: special considerations for PEs of insurance companies

For insurance companies capital, along with reserves (or “technical provisions”), provides support for risks insured. The capital and reserves are backed by investment assets and consequently investment income makes up a significant part of the total income of an insurer’s business. The attribution of capital and reserves is therefore an important component in calculating the profit attributable to a PE of an insurance company.

TIOPA10/S43(7) uses the term “free assets”, which recognises the fact that the capital is backed by investment assets. Subject to any provision being made by regulations under S43(8) the meaning of the term “free assets” is that given in Statutory Instrument 2003 No.2714).

The OECD Report (see INTM288020) sets out two authorised approaches to attributing the total amount of investment assets to the PE, based on the risk it has assumed; the capital allocation approach (Part IV Section C-1 iii) b) and the thin capitalisation / adjusted regulatory minimum approach (Part IV Section C-1 iii) c). As discussed at INTM288010 TIOPA10/S43 requires the use of the “capital allocation” approach.

The OECD Report goes on, at Part IV Section C-1 iii) f), to deal with the question of what investment yield should be attributed to the assets, once the total amount of investment assets to be attributed to the PE has been determined. In particular this addresses the question of how to determine investment yield in respect of any amount of investment assets attributable to the PE in excess of the amount actually held in the host country.

Paragraphs 167-169 discuss a “top-down” approach to determining investment yield on additional assets (with reference to the rate of return on all investment assets, or all uncommitted investment assets, held by the company). Paragraph 170 considers a “bottom-up” approach (with reference to the rate of return earned on investment assets actually held in the host country). Which approach would be expected to provide the most reliable proxy for the actual return on a particular PE’s free investment assets is a question to be considered against the circumstances of that PE. TIOPA10/S43 does not specify a single approach.

The principles of the OECD Report in relation to the attribution of profits to insurance establishments are discussed in more detail in the General Insurance Manual at GIM10210 onwards.