The OECD and country representatives of the OECD Working Party 11 (‘WP11’) are likely to recommend in the BEPS action plan that local interest limitation rules should focus primarily on an interest/EBITDA cap, whereby countries may set the cap within certain boundaries (30% and 10% likely to be put forward as upper and lower limits).
As WP11 held intensive meetings on various BEPS action points to allow the OECD to prepare a final version in the coming weeks for proposal to the G20 in early October, it is understood that an important part of these discussions was around Action 4. The purpose of Action 4 is to develop best practice for countries on local interest limitation. The upcoming report is expected to also conclude that:
- group-wide interest limitation rules, proposed in the most recent discussion draft, would only remain as an optional carve-out rule (to potentially allow a higher interest deduction); and
- industry-specific rules would be further developed for the banking and insurance sectors. It remains unclear whether other sectors will have specific rules (e.g. hedge funds).
Some additional clarifications and input are expected in 2016 while the first effective milestone to assess the outcome is scheduled for 2020. Taxpayers will need to pro-actively revisit their intercompany financing arrangements, taking into account these developments.
More information on the OECD recommendations on interest limitation rules can be found here.