The OECD invited interested parties to provide comments on a discussion draft which deals with approaches to address BEPS involving interest in the banking and insurance sectors under Action 4 (Interest deductions and other financial payments) of the BEPS Action Plan.
The use of interest is one of the simplest profit-shifting techniques available in international tax planning as it allows to adjust the mix of debt and equity in an entity. The BEPS report Limiting Base Erosion Involving Interest Deductions and Other Financial Payments (the Action 4 Report or the Report) includes a common approach to tackling BEPS involving interest and payments economically equivalent to interest. The main focus of Action 4 is a fixed ratio rule, which restricts an entity’s net interest deductions to a fixed percentage of its Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) calculated using tax principles.
Compared to other forms of businesses, banks and insurance companies typically have net interest income rather than net interest expense as they are key providers of debt finance to groups in other sectors, either as lenders or as investors in corporate bonds. Banking and Insurance groups also have differences between each other in terms of their business models, their structure and the ways they are financed and regulated.
Action 4 establishes a common approach to tackling BEPS involving interest, but highlights a number of factors which suggest that a different approach may be needed to address risks posed by entities in the banking and insurance sectors. The discussion draft has been produced as part of the follow-up work on this issue, which focuses on:
Comments should be submitted by September 8, 2016 at the latest.
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