INTM489440 - The Unassessed Transfer Pricing Profits Examples: Examples 11 - Intragroup reinsurance within a non-insurance group

Facts

  • This is a multinational group that manufactures specialist high value plant in a number of European countries. Failure of its products can give rise to significant catastrophic loss. However, the group has excellent quality control systems and it has been 15 years since the last customer claim.
  • The group has three major manufacturing centres, and each manufacturing entity is responsible for the insurance of its own products.
  • Company A is one of manufacturing centres, it is UK resident and manufactures the most technologically advanced products for sale around the world. Company A has negotiated an insurance policy for product indemnity with one of the largest insurance multinationals.
  • The policy has a cover limit of €500m in any one year. Company A also arranged for further cover of €50m to be placed with the intragroup insurer, Company B, established in a low tax jurisdiction.
  • Company B employs three people part time including a senior underwriter. It is located in a low-tax jurisdiction.
  • Company A pays insurance premiums to the external insurer, and to Company B.

Analysis

  • The provision is the intragroup insurance provided by Company B to Company A.
  • HMRC considers that at arm’s length, Company A would not have obtained any insurance policies beyond the large product indemnity already secured with an external provider.
  • The UK company has sufficient liquid assets to meet expected potential claims in excess of the cover. The functions performed by the group insurer are minimal and there are no commercial motives or benefits from the transaction other than the tax saving.
  • Therefore the unassessed transfer pricing profits are the full amount of the premium that Company A has paid for the intragroup insurance. Certain fact patterns may also support the conclusion that investments funded by the premium would have been held by the UK company or that the funds would have been applied in some other way, for example if the intragroup insurer was applying some part of them to lend back to the premium payer.
  • There is an ETMO because although the premiums received by Company B are fully recognised for tax purposes, Company B is located in a low tax jurisdiction.
  • Considering the TDC, given the absence of commercial benefit from the arrangements it is reasonable to assume that absent the tax mismatch Company A would not have insured with the group insurer. Therefore, the transaction was designed to secure a UK tax reduction.
  • The same analysis would apply if a third party fronter had been interposed between the UK company and the group insurer, with the third party reinsuring 100% of the risk it assumes to the group insurer. The provision for UTPP purposes would be between the UK company and the group insurer. As all of the other facts are the same as in the example the provision is subject to a UTPP charge.
  • There may be commercial reasons for a non-insurance group to use intragroup insurance/reinsurance but there are likely to be very limited circumstances where the specific fact pattern would support the conclusion that UTPP is not in point. The reinsurance of a high proportion of the risk held by the group insurer out to a third-party reinsurer may be an indicator that the intragroup insurer has not been set up primarily to achieve tax reductions.