Transfer pricing considerations in a post-Brexit Europe

Broking Business - Summer 2023

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Increased scrutiny from regulatory and tax authorities means that UK-based MGAs and brokers operating in the EEA will need to (re)assess their business operating model from a transfer pricing perspective.

Historically, UK-based insurance intermediaries were able to operate throughout the EEA through the EU single passport regime. Post-Brexit, these rights have been lost, effectively forcing groups to restructure their operations to access EEA-wide markets.

A common post Brexit structure has been to set up a branch in an EEA member state. By becoming licensed or authorised in an EEA member state, the UK group regained EU passport rights. Belgium and Ireland have been popular choices, especially for UK-based brokers. EEA regulators impose stringent requirements regarding personnel, reporting and other controls to establish an EEA branch, and deter so-called “brass plate” entities of overseas based groups.

As post-Brexit operating models are increasingly subject to regulatory and tax authority scrutiny, UK groups should perform a (re)assessment of the underlying economics of the business and cross-border flows relating to products, services, IP, and financing from a transfer pricing perspective. This should identify whether the group’s current arrangements are on arm’s length terms, and in line with the requirements of the relevant tax authorities.

Transfer pricing rules and EEA branches

The UK and EEA member states follow the international principles which govern the attribution of profits (or losses) to a permanent establishment (“PE”) under Article 7 of the OECD Model Tax Convention. The Authorised OECD Approach (“AOA”) is therefore generally applied to an EEA branch of a UK-based insurance group, which is carrying on insurance business in the EEA through the PE.

Under the AOA approach, the performance of key entrepreneurial risk-taking functions (“KERTs”) is the guiding principle for allocation of underwriting profits and investment income to an EEA branch of a UK insurance carrier. This focuses on the assumption of insurance risk as a result of the underwriting function, including setting the underwriting policy, risk classification and selection, pricing, risk retention, and the acceptance of the insured risk.

However, depending on circumstances, product development and management, sales and marketing, and risk management and reinsurance, may represent active decision-making functions concerning the acceptance of insurance risk. Generally, the relevant tax authorities focus on the ability of local employees to make decisions regarding risk bearing opportunities, as well as their capability to respond to these opportunities.

As European countries may have different interpretations to the application of the AOA approach, local country insights are important to manage potential double taxation issues on the structuring of cross-border business arrangements.

UK-based groups with an EEA branch, including MGAs and brokers, should consider whether their post-Brexit operating model has a transfer pricing policy which appropriately rewards value creation in the UK. In particular, the factors that were taken into account in 2020 (or prior) to be ready for Brexit may now have been overtaken by subsequent commercial events, meaning that the fact patterns that informed previous pricing decisions may no longer be relevant.

The UK company (head office) may be providing a range of business critical and enabling services with cost recharges allocable to an EEA branch, covering UK based management, back-office support, business placing, actuarial, and increasingly now, access to software or platform technology. Each will require appropriate reward to the UK through appropriate pricing options, such as cost plus, commission sharing, or profit split, depending on the group’s operating model and where value is created.

UK groups will have to consider the arm’s length principle to ensure that appropriate income and profits (or losses) are booked in the UK company and its EEA branch, in compliance with transfer pricing rules. Transfer pricing rules in the UK and EEA member state may have additional requirements, such as preparation of transfer pricing documentation, Country-by-Country Reporting, and transaction reporting to the relevant tax authorities. Non-compliance can result in potential tax authority enquiries, tax adjustments, and interest and penalties.

Transfer pricing risks and opportunities

A (re)assessment of post-Brexit operating models of UK-based insurance intermediary groups from a transfer pricing perspective is critical for identifying potential tax compliance gaps, but there are also opportunities. Reassessing profit attribution to an EEA branch can assist groups to understand where and how value creation takes place and optimise the business operating model. How the branch model has developed for the group may give a reality that is different to assumptions made when the structure was initially designed – resulting in potential opportunities and risks in respect of the current transfer pricing arrangements.

If you would like further guidance, please contact our Transfer Pricing Director Farhan Azeem, who collaborates with local experts across our international network. Find out more about our Transfer Pricing services here.