Final report on limiting interest deductions and other financial payments
On 5 October 2015, ahead of the G20 Finance Ministers’ meeting in Lima on 8 October, the OECD published 13 papers and an explanatory statement outlining consensus actions under the base erosion and profit shifting (BEPS) project (for prior coverage, see the tax alert dated 5 October 2015). These papers include and consolidate the first seven reports presented to, and welcomed by, the G20 Leaders at the Brisbane Summit in 2014.
The output under each of the BEPS actions is intended to form a comprehensive and cohesive approach to the international tax framework, including domestic law recommendations and international principles under the OECD model tax treaty and transfer pricing guidelines.
As part of the 2015 output, the OECD has published a final report on Action 4, which sets out a best practice approach for countries to prevent erosion of the tax base through the use of interest expense. Action 4 is focused on the use of third-party, related party and intragroup debt to obtain “excessive” deductions or to “finance the production of exempt or deferred income.” Notably, the report does not cover the transfer pricing aspects of financial transactions, which will be addressed in a separate project during 2016 and 2017.
At present, it appears that Australia will retain its current thin capitalisation rules, rather than adopt the OECD’s recommendation on Action 4.