Attribution of assets, and investment yield, while key
requirements in arriving at profits, are not the only
considerations. The second step is to apply, by analogy, the
guidance in the OECD Transfer Pricing Guidelines to any economic
relationships (‘dealings’) between the permanent
establishment and the rest of the enterprise. The Authorised OECD
GIM10210) is to record all income
associated with the insured risks accepted by the permanent
establishment and the supporting investment assets in the books of
the Host State as ‘economic owner’ of the portfolio of
risks and supporting assets, and to attribute to it expenses in
respect of dealings representing an arm’s length reward for
the functions performed by other parts.
Dealings between the permanent establishment and the company of which it forms part need close scrutiny. In the necessary absence of legal documentation, clear evidence would be required to demonstrate that an internal dealing had taken place, and the features relating to it. Internal reinsurance is unlikely to feature, because the risk placing is a primary determinant of placing the key entrepreneurial risk taking (KERT) function itself. No dealing that internally transfers economic ownership of insurance contracts or associated risk will be recognised unless it can be demonstrated that another part of the enterprise has performed the relevant KERT function.
Risk management, as distinct from acceptance, will normally feature as a dealing to be rewarded by an arm’s length fee rather than constitute a KERT function in its own right. In this context, the KERT function may include price-setting and risk retention analysis, but will generally (see below) exclude
INTM463100+ explains how the 5 factors for determining
comparability identified by OECD Transfer Pricing Guidelines are
applied. The OECD Report on the Attribution of Profits to Permanent
Establishments (paragraphs 183 to 191) highlights
Central to the analysis is to understand what is meant by the underwriting function. The part of the enterprise which has taken the decision to assume risk at a particular price will be the contracting point with the insured and entitled to the associated underwriting and investment income. Care must be taken in identifying the underwriting functions that constitute active decision taking. In some cases, the risk taking function may be linked with sales and marketing, but ‘rubber stamping’ will not so qualify. The type of business will be relevant, for example travel insurance risk will be accepted by the person who sets the parameters for a program supporting on-line transactions.