Oecd/G20 Base Erosion and Profit Shifting Project Limiting Base Erosion Involving Interest Deductions and Other Financial Payments, Action 4 - 2015 Final Report

This report analyses several best practices and recommends an approach which directly addresses the risks outlined above. The recommended approach is based on a fixed ratio rule which limits an entity's net deductions for interest and payments economically equivalent to interest to a percentage of its earnings before interest, taxes, depreciation and amortisation (EBITDA). As a minimum this should apply to entities in multinational groups. To ensure that countries apply a fixed ratio that is low enough to tackle BEPS, while recognising that not all countries are in the same position, the recommended approach includes a corridor of possible ratios of between 10% and 30%. The report also includes factors which countries should take into account in setting their fixed ratio within this corridor. The approach can be supplemented by a worldwide group ratio rule which allows an entity to exceed this limit in certain circumstances Abstract: The mobility and fungibility of money makes it possible for multinational groups to achieve favourable tax results by adjusting the amount of debt in a group entity. The recommended approach ensures that an entity's net interest deductions are directly linked to its level of economic activity, based on taxable earnings before deducting net interest expense, depreciation and amortisation (EBITDA). This approach includes three parts: a fixed ratio rule based on a benchmark net interest/EBITDA ratio; a group ratio rule which allows an entity to deduct more interest expense in certain circumstances based on the position of its worldwide group; and targeted rules to address specific risks. A country may choose not to introduce the group ratio rule, but in this case it should apply the fixed ratio rule to multinational and domestic groups without improper discrimination