Today, the OECD broadcasted a webcast on the progress of its BEPS Action Plan. The expectations of this webcast were very high as the OECD had previously announced it would publish relevant Discussion Drafts after the webcast, which potentially could have a serious impact on intercompany financing. While the OECD gave insights into some items, such as interest deduction limitations (see below), other topics were not yet commented.
Limit base erosion via interest deduction or other financial payments (Action 4)
Two topics that will be covered by Action 4 are the development of transfer pricing guidance regarding financial transactions and the development of rules to prevent base erosion through excessive interest deductions.
On the transfer pricing guidance, the OECD indicated that it will only publish the related Discussion Draft early 2015. No comments were given on the principles that will be captured in the document.
The discussion draft on BEPS relating to excessive interest deduction will be released later this week. During the webcast, the OECD already gave some insights into the approaches it considers, i.e. a “group wide test”, “a fixed ratio test”, or a combination of the two to limit interest deductions to group entities.
A group-wide test would:
- limit a company’s net interest deductions to a proportion of its group’s actual net third party interest expense, based on a measure of economic activity such as earnings or asset value;
- aim to allow groups to claim tax relief for their real cost of funds, while protecting countries from excessive deductions;
- let groups continue to centralise third party borrowings in the entity/country which is most efficient for non-tax purposes, while tax relief for interest is matched with economic activity;
- include a best practice recommendation that an agreed approach be applied consistently by all countries or provide flexibility for a country to incorporate existing tax principles within its rule.
A fixed ratio test would:
- operate by applying a fixed benchmark ratio to an entity’s earnings or asset value;
- be more straight-forward for groups and tax authorities to apply;
- be relatively inflexible, applying the same benchmark ratio to all entities;
- make it difficult to establish the correct benchmark ratio;
- be uncertain since work based on published data suggests that, where countries currently restrict interest deductions based on a fixed interest/EBITDA ratio, these ratios may be set at a level which is too high to tackle BEPS.
Risk and capital (Action 9)
This BEPS Action item can also have a major impact on some financing structures as it aims to develop rules to prevent BEPS from transferring risks among, or allocating excessive capital, to group members. Although the publication of the related Discussion Draft is also planned for mid-December, the OECD did not yet comment on this topic during the webcast.
PwC will publish more detailed newsletters shortly after publishing of the Discussion Drafts.
We are quite certain that at least some of the above (and maybe other) points of attention will be relevant to your company, and are happy to further discuss any tax and/or accounting matters during a telephone conversation or an in-person meeting in the weeks to come.
The OECD slides that have been used during the webcast can be found here.