Article 7 of the OECD Model gives no further rules for
determining what the arm’s length amount of excess assets of
an insurer might be. Methods (
GIM10180) have been devised which
although mechanical are designed to test whether the assets
appropriated to the branch/permanent establishment are sufficient
to meet the separate enterprise hypothesis in Article 7(2). These
methods are based on the proposition stated in the
General Reinsurance mentioned in
GIM10160. They are also justified by
reference to the case of
Sun Life ofCanada v Pearson (1986) 59TC250 (see in
particular page 306), and paragraphs 24 and 27 of the Commentary on
Article 7 in the 2000 Commentary on the OECD Model. Paragraph 24 of
the Commentary says:
“It is usually found that there are, or
there can be constructed, adequate accounts for eachpart or section of an enterprise so that
profits and expenses, adjusted as may be necessary,can be allocated to a particular part of the
enterprise with a considerable degree of precision.This method of allocation is, it is thought,
to be preferred in general wherever it is reasonablypracticable to adopt it. There are, however,
circumstances in which this may not be the caseand paras 2 and 3 [of Article 7] are in no way
intended to imply that other methods cannotproperly be adopted where appropriate in order
to arrive at the profits of a permanentestablishment on a “separate
enterprise” footing. It may well be, for example, that
profits ofinsurance enterprises can most conveniently be
ascertained by special methods ofcomputation, e.g. by applying appropriate
coefficients to gross premiums received from policyholders in the country concerned. Again, in
the case of a relatively small enterprise operatingon both sides of the border between two
countries, there may be no proper accounts for thepermanent establishment nor means of
constructing them. There may, too, be other caseswhere the affairs of the permanent
establishment are so closely bound up with those of thehead office that it would be impossible to
disentangle them on any strict basis of branchaccounts. Where it has been customary in such
cases to estimate the arm’s length profit of apermanent establishment by reference to
suitable criteria, it may well be reasonable that thatmethod should continue to be followed,
notwithstanding that the estimate thus made may notachieve as high a degree of accurate
measurement of the profit as adequate accounts. Evenwhere such a course has not been customary, it
may, exceptionally, be necessary for practicalreasons to estimate the arm’s length
profits.”
