BEPS Action 4 Discussion draft: deductibility of interest and other financial payments
On 18 December 2014, the OECD released a discussion draft on Action 4 in relation to the deductibility of interest expense and economically equivalent financing payments (‘the Draft’) as part of its base erosion and profit shifting (‘BEPS’) initiative.
The Draft outlines the following approaches to tackle BEPS issues arising from the use of interest and other financial payments:
- Group-wide tests under which the allowable interest deductions for a particular entity are determined based upon the debt position of the group
- Fixed-ratio tests applied on an entity by entity basis limiting a company’s interest deductions by reference to a benchmark ratio of earnings, assets or equity
- A combination of the above two tests.
In each case, the rules would likely be supported by specific targeted rules
Notably, it does not cover the transfer pricing aspects of interest deductibility, which will be covered in a separate consultation document.
The Draft also summarises a number of areas where further work is needed, and sets out how Action 4 may interact with other BEPS measures, such as the hybrid mismatch proposals in Action 2 and the controlled foreign company (‘CFC’) proposals in Action 3.
Consistent with other BEPS discussion drafts, the proposals do not represent a consensus view from the G20/OECD governments, but are designed to provide preliminary proposals for public analysis and comment.