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BEPS: OECD discussion paper on interest deductibility group ratio rule

BEPS: OECD discussion paper on interest deductibility group ratio rule

Business Tax

The OECD published a discussion paper on 11 July 2016 on the design and operation of the group ratio rule contained in its proposals for restricting interest deductibility under Action 4 of its base erosion and profit shifting (BEPS) project.

The discussion paper discusses the group ratio rule, which allows entities to deduct interest up to the net interest to EBITDA ratio of its worldwide group. The paper says that further work needs to be conducted on (i) the calculation of net third-party interest expense; (ii) the calculation of group-EBITDA; and (iii) the impact of losses.

The approach of the paper appears to balance the competing interests between international consistency and allowing implementing countries the scope to pursue their own domestic tax policy goals. Whether this proves to be an effective balance will depend on how the OECD's recommendations are implemented in practice.

Full analysis of the impact of the OECD's interest deductibility proposals as a whole is also hampered by the incomplete work on areas such as the application of the rules in the banking sector. The fact that the OECD's work in this area is incomplete begs the question whether the UK's work on implementation is advancing too quickly and whether the OECD's work should be finalised before the UK pushes ahead with enacting rules based on recommendations that are, currently, a work in progress.