Transfer pricing

Attribution of profits to permanent establishments of insurance companies and current status of the project


On 27 June 2005 the OECD Committee on Fiscal Affairs released for public comment a Discussion Draft on the Attribution of Profits to Permanent Establishments of Insurance Companies. Contributions received to date can be downloaded below:

Working Party No.6 of the Committee on Fiscal Affairs, the subsidiary body in charge of this project, will discuss comments received at its next meeting in November.  It is pleased at the response to its invitation to comment, and a consultation with the insurance sector will take place early in 2006.

An update on the wider project

The Discussion Draft is part of a wider project to develop new guidance on attributing profits to permanent establishments under Article 7 of the Model Tax Convention. This project was initiated by Member governments because of the lack of a consensus interpretation and application of the current Commentary. The project is in four Parts.

Part I provides guidance as to the preferred interpretation of paragraphs 1-5 of Article 7 of the Model Tax Convention. A Working Hypothesis was developed to examine how far a permanent establishment could be treated as a functionally separate entity for the purposes of attributing tax profits. It takes the view that the arm’s length principle and Transfer Pricing Guidelines – which form the international tax consensus for transactions between associated enterprises - should be applied by analogy to permanent establishments. Part I was released for public comment in 2001 and 2004 and discussed at a public consultation in Paris in 2002. It is still under discussion by the Working Party with the objective of finalising it by January 2007.

Part II of the Discussion Draft examines how the approach applies to permanent establishments carrying out traditional banking activities (borrowing and on-lending of money). It was released for public comment in 2001, with a revised discussion draft issued in 2003.  The draft has benefited from two consultations with business representatives in 2002 (Paris) and 2004 (Geneva).

Part III discusses the application of the approach to the global trading of financial instruments. It was released for public comment in 2003 and discussed at the Geneva consultation in 2004.

Having gone through this extensive consultation process, Parts II and III are now regarded by the Working Party as nearing completion. The final text will be released together with a document setting out how the OECD has dealt with the comments received from business. At the same time as Parts I to IV are being completed, the CFA is working on how the new approach will be implemented in the Model Tax Convention and its Commentary. The objective remains to finalise the whole project by January 2007.
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