In arriving at profits attributable to a permanent establishment it is necessary to attribute an investment yield to the attributed assets. Two different approaches are discussed in the OECD Report ( GIM10210), ‘top-down’ and ‘bottom-up’.
To the extent that the amount of investment assets attributable
to the permanent establishment exceeds the amount of investment
assets actually held in the host country, the excess assets should
earn a return equal to the rate of return (having due regard to
those assets which do not give rise to income, see
GIM10220) earned on all investment
assets held by the company that are not required to be held in
trusteed accounts in other countries to support business
(‘uncommitted assets’). This may be difficult and use
of the rate of return on all investment assets may suffice in many
cases. Always the facts and circumstances must be taken into
account, for example taking account of underperforming assets or
currency inflation.
It may be possible to identify the yield on those categories
of the company’s uncommitted investment assets that are most
appropriate to associate with the establishment. Currency matching
and risk hedging may also be a factor.
This assumes that the rate of return earned on investment assets
held by the Host State of the insurance permanent establishment is
also earned by the ‘uncommitted’ investment assets
attributed to the permanent establishment above the investment
assets actually held.
The results of both these approaches necessarily approximate
the actual return on free investment assets, and as always
flexibility and due regard to the facts and circumstances are
needed.
