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
Approach (
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
insurance-specific features.
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.
