12 January 2015

Comments on "Preventing the Artificial Avoidance of the Permanent Establishment Status"

Insurance Europe and the Global Federation of Insurance Associations have provided its comments on the OECD’s Discussion draft Preventing the Artificial Avoidance of the Permanent Establishment (PE) Status (Action Point 7).

In the insurance sector in determining attribution of profits to a PE, the key focus is on establishing where the key entrepreneurial risk-taking (“KERT”) functions are undertaken. The 2010 OECD Report on the Attribution of Profits to Permanent Establishments Part IV recognises that the KERT is with the person that assumes the risk (underwriting). The KERT as described in Part IV of the 2010 OECD Report has provided a framework that is considered to effectively work for tax author ities and the insurance sector. Therefore, anything that decreases the effectiveness of Part IV should be approach with caution.

In the insurance section, the definitions of a PE for regulatory and tax purposes are largely aligned and should remain so. Misalignment of PE definitions for tax and regulatory purposes, as under Option M, would generate an additional compliance burden e.g. there might be a need to determine premium investment income separately for regulatory and tax purposes).

There is no need for a specific provision for the insurance sector (Option M) according to which an insurance company would be deemed to have a permanent establishment in country where premiums are collected by a dependent agent. If this proposal is adopted insurance companies would be faced with disproportionate administrative burden as numerous – possibly hundreds PEs would be created resulting in increased compliance burden in terms of corporate income tax obligations.

Furthermore, if the principles within the 2010 OECD Report on the Attribution of Profits to a Permanent Establishment Part IV were followed, then these PEs would have little or no profit attributed to them on the basis that the KERT function is not being carried out in the PE and the profit would therefore be limited to a fee for intermediation services. Therefore, the tax generated in the host state would be minimal.

The OECD proposals on commissionaire arrangements should not be applicable to insurance sector because the objective of these arrangements and insurance are substantially different. The insurance agent, unlike a commissionaire, is acting purely as a point of contact for clients seeking to purchase insurance, including the collection of premiums and therefore even an agent who has the characteristics of a dependent agent should not create a PE of the insurance enterprise. Insurance agents are not permitted to accept insurance risk as they are not regulated entities and do not have the necessary capital that is required by the regulator to a ccept insurance risk.

The OECD’s overall approach of lowering the dependent agent threshold below the “concluding contracts” test is likely to introduce greater subjectivity into the determination of whether a PE exists in any particular case. This can lead to various interpretations across tax authorities resulting in costly disputes for business and the possibility of double taxation. Guidance is this area needs to be clear and tax authorities need to apply the guidance sensibly and consistently.

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