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OECD Tackles Attribution Of Profits To Insurance PEs

by Ulrika Lomas,, Brussels

24 August 2007

The Organisation for Economic Cooperation and Development has published a revised report on the question of how the profits of Permanent Establishments in the insurance industry should be attributed, as the business becomes increasingly globalised.

The revised discussion draft of Part IV (Insurance) of the Report on the Attribution of Profits to Permanent Establishments replaces the version released in June 2005, and was put together following a consultation meeting with representatives of the insurance industry on 31 March 2006, at which the tax administrations from 14 countries and over 40 private sector participants were present.

Part IV of the Report looks at the insurance industry, and discusses how the authorised OECD approach applies to situations commonly found in enterprises carrying on an insurance business through a PE. More specifically, Part IV applies the authorised OECD approach to the operation of property and casualty insurance, life insurance, and reinsurance activities.

"The insurance industry presents a number of unique challenges to tax authorities," the report noted.

It continued:

"Traditionally, the nature of the ongoing relationship created by insurance resulted in customers dealing largely with domestic insurers with whom they were comfortable. However, the insurance industry rapidly is becoming more global. Cross-border merger and acquisition activity is increasing, which will result in greater consolidation of the industry. As a result, tax authorities may find it difficult to find useful comparable transactions for the purpose of doing a transfer pricing analysis. Insurance companies may find it advantageous to operate through PEs in a number of jurisdictions, rather than through subsidiaries, because certain host state regulators rely on regulation by the home state and so may impose a lower capital requirement or none at all. Host states may not have developed rules for attributing profits to such PEs, or there may be questions about whether those rules, where they exist, are fully compatible with their existing treaty obligations."

The Report also took account of the fact that some companies are exploring the use of electronic and faxed communications, or the Internet, to issue policies cross-border without establishing physical PEs.

The revised draft has been released for further consultation.

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