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The Organization for Economic Cooperation and Development should further broaden the definition of a key entrepreneurial risk-taking function in its most recent discussion draft on how insurance companies should attribute profits to a permanent establishment, as well as recognize that internal dealings, such as reinsurance, can be a KERT function, industry representatives said in comment letters received by Nov. 6.
The comments focused on two of the most significant changes to the draft on insurance, issued in August. That version substantially revised the section on reinsurance and amended the definition of KERT in the previous draft, issued in June 2005.
The 2005 draft defined KERT functions as "those which require active decision-making with regard to the taking on and day-to-day management of the individual risks and portfolio risks that have been identified as the most important under the functional and factual analysis." Language in paragraph 73 of the latest draft, by contrast, states that the KERT function in the insurance industry "is the assumption of insurance risk" (16 Transfer Pricing Report 308, 9/6/07).
The draft on insurance is Part IV of the OECD's project on attributing profits to a PE. Parts I through III deal with general considerations, traditional banking, and global trading. The OECD in December 2006 eliminated the KERT concept from much of its guidance in Part I, replacing it with "significant people functions" (15 Transfer Pricing Report 654, 1/3/07).
The OECD met Nov. 26 in Paris with those who submitted comments on the latest draft of Part IV, according to Christopher Faiferlick, who along with Robert Ackerman submitted comments from Ernst & Young LLP in the United States.
In addition to broadening the KERT definition and recognizing reinsurance transactions, those commenting on the latest draft of Part IV said the OECD should:
* broaden the definition of "reserves" to include non-interest bearing assets;
* give priority to the home country under methods used to allocate investment assets; and
* eliminate a change to the definition of the arm'slength principle to conform with the definition in paragraph 6 of the organization's transfer pricing guidelines.
KERT. Industry representatives generally were pleased with the new language describing a KERT function, which the draft defined in paragraph 69 as "the assumption of insurance...