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Permanent establishments
Only the presence of key entrepreneurial risk-taking functions (KERT) should give rise to tax permanent establishments; profits are allocated for tax purposes dependent on where the KERT is located. In insurance, the KERT is with the person/entity that assumes and manages the insurance risk through underwriting and thus profit should be allocated to such function. If PEs are created in the location of non-KERT functions, a disproportionate compliance burden would result as numerous PEs could be created with no additional profits being attributed.
Risk transfer, transfer pricing and cross border (re)insurance
Insurers optimise and diversify their risk portfolio via intra-group transfers of risk through reinsurance. OECD BEPS and the European Commission’s corporate taxation initiative should not impinge on these arrangements.
Income arising from risk assumption in a different territory to the location of the risk is not an automatic indicator of BEPS activity in insurance. This is merely a consequence of insurers managing risks on a global basis, including through reinsurance.
CFC rules should not restrict the commercial operations of insurers and arrangements which are demonstrably required to optimise capital efficiency and to reinsure third-party risks.
Capital and interest deductions
Existing regulatory requirements put an overall limit on the level of debt and hence interest deductions that an insurer can claim. Therefore, interest paid as part of insurers’ ordinary capital structures and business operations should be excluded from any further limitation.
Any specific transactions relating to interest expense which are seen as posing BEPS risk other than in respect of regulatory capital should be addressed by specific targeted rules.
Hybrid regulatory capital is not designed to create tax mismatches and its use does not constitute a harmful tax practice. On the other hand, this type of capital is very useful to insurers, for regulatory and commercial reasons. Therefore, hybrid regulatory capital should be exempted from any additional tax burden.
Country-by-country reporting
Enhancing the transparency towards tax authorities, streamlining of reporting requirements and the protection of commercially sensitive information have to be seen as equally import ant goals. Effective compliance with the new country-by-country reporting regime will require significant preparation and it is therefore important that companies receive clear and timely guidance regarding the definition of the data to be reported.
Insurance business models are unique and this needs to be recognised when the information on the CbCR template is considered.