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VII.Tax
In October 2015, the final BEPS reports were released. This was a significant achievement, given that the detailed discussions and recommendations come after just two years of consultation with every G20 and OECD country, along with input from the European Commission and a number of developing economies. Some detailed work is still to be done at the inter-governmental level, but the main burden has shifted to national governments to implement the recommendations.
The U.K. strongly supports the BEPS Project and is chairing the group that will be responsible for drafting the multilateral instrument to update the bilateral tax treaties. The U.K. government has already begun to implement the BEPS recommendations to the extent it can do so unilaterally, but some measures require international cooperation.
2. OECD BEPS Project
a. Definition of Permanent Establishment
U.K. corporation tax is chargeable only if a company is either a U.K. resident for tax purposes or it has a “taxable presence” in the U.K. A taxable presence exists where trade is carried on through a permanent establishment (“PE”), which is either a fixed place of business in the U.K. or a dependent agent who does business in the U.K. on the company’s behalf.
As addressed in our 2014 Year in Review, in October 2014, the OECD released a discussion paper which contained proposals on widening the definition of a dependent agent PE from a person who “concludes contracts” to a person who negotiates the material elements of contracts or “engages with specific persons in a way that results in the conclusion of contracts.” Further, the discussion paper considered following the lead of the United Nations Model Double Tax Convention of deeming an insurance enterprise to have a PE in a state in which it collects premiums or insures local risks through an exclusive agent.
These proposals were put forward to address the concern that insurance companies could do large-scale business in a state without being taxed in that state on the basis that it is possible to do so without having a fixed place of business or a dependent agent PE within the existing terms of most treaties.
Developments and Trends in Insurance Transactions and Regulation 2015 Year in Review
In June 2015, the OECD published a revised discussion draft, noting that the vast majority of comments received put forward the view that there should be no special rules applicable to the insurance industry. Taxation based on premiums collected would create a misalignment with the existing insurance regulatory framework and create risks of double taxation (e.g., tax on insurance premiums).
While the OECD backs away from the more targeted changes proposed in the 2014 discussion draft, the OECD still believes that its concerns in relation to taxation in a typical insurance business model can be addressed in other ways, such as:
member countries choosing to include a provision in their bilateral agreements that stipulates that insurance companies are deemed to have a PE in a state if they collect premiums in that state through an agent established there;
through transfer pricing adjustments; or
through the more general changes proposed to the
definition of PE.
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The OECD’s final recommendation in relation to the general definition of a dependent agent PE is that it should include a person who “habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise.” This would capture the “rubber-stamping” of insurance contracts in low tax jurisdictions, while the real direction is provided by persons located elsewhere.
The new draft commentary explains that this wording is aimed at situations where the conclusion of a contract directly results from the actions that the person performs in a country on behalf of an enterprise even though, under the relevant law, a contract is not concluded by that person in that country. The intention is to supplement the “concludes contracts” test with a test focusing on substantive activities taking place in a country; the principal role leading to the conclusion of a contract will typically be associated with the actions of a person who convinced the third party to enter into a contract with the enterprise. This includes soliciting and receiving (even if not formally finalizing) orders, but does not include mere