GIM10160 - Non-resident insurers: the scope of UK taxing rights: accounting periods beginning before 1 January 2003: section 11 ICTA & Article 7 OECD Model: attribution of the investment return: solvency margin
It is appropriate therefore to contend that section 11 and Article 7(2) allow an amount of investment yield on assets over and above the solvency margin (or would be solvency margin in the case of an EEA insurer) to be attributed to the UK branch. This will be necessary to show that the investment yield on branch assets conforms to the arm’s length principle. The yield on such assets is within section 11, as trading income arising directly or indirectly through or from a branch or agency. Circumstances in which this might apply include:
- where the business has always been “underfunded”, reliance being placed on the company-wide assets to give the market confidence;
- where the transfer back to Head Office and therefore outside the UK of premium income and other cashflow in amounts in excess of what at arm’s length it would have been prudent for the branch - considered as a separate entity - to distribute;
- where the deliberate use in the UK of low yielding assets is not appropriate to the nature of the business, thus understating investment income and
- where possibly the decision not to realise assets held for the UK branch while realising assets outside the branch in a ratio or manner is not appropriate to the split of business.
For enterprises such as banks the question is whether, given a
level of liabilities which bear interest and liabilities which do
not (“equity capital”), what proportion of each would a
stand-alone enterprise hold. If the amount of interest bearing
capital is higher than would be held at arm’s length, the
costs associated with that loan capital are disallowed as
representing a return on equity.
For an insurer, the question is different. An insurer does
not have loan capital – it has liabilities, payment of which
is deductible. Its “equity” capital is represented by
the excess of its assets over liabilities. This excess consists of
regulatory capital – the minimum solvency margin etc, and
other economic capital – as required by both the regulator
and the market. See in this regard General Reinsurance Co. Ltd v
Tomlinson 48TC81, where it is stated, on the separate
enterprise/arm’s length hypothesis required by the DTA, that
‘…it would be necessary for [the
non-resident company] to have a portfolio of investments in order
to carry on its business.’’
