On July 11, 2016, the OECD released a discussion draft on elements of the design and operation of the Group Ratio Rule with respect of interest deduction limitations.

The final version of the report on Action 4 (Limiting Base Erosion Involving Interest Deductions and Other Financial Payments) includes a common approach to tackling BEPS involving interest and payments economically equivalent to interest. At the heart of the common approach is a fixed ratio rule which restricts an entity’s net interest deductions to a fixed percentage of its earnings before interest, taxes, depreciation and amortisation (EBITDA) calculated using tax principles.

The final report also recommended that countries consider introducing a group ratio rule which will allow an entity in a highly leveraged group to deduct net interest expense in excess of the amount permitted under the fixed ratio rule, based on a relevant financial ratio of its worldwide group. Such group ratio rule permits an entity to deduct net interest expense up to the net third party interest expense/EBITDA ratio of its group.

The discussion draft, which has been produced as part of the follow-up work on this issue, focuses on three particular topics:

  • approaches to calculate a group’s net third party interest expense,
  • a definition of group-EBITDA, and
  • approaches to deal with the impact of losses on the operation of the group ratio rule.

Even though the discussion draft does not represent consensus views of the Committee on Fiscal Affairs (CFA) or its subsidiary bodies but is intended to provide stakeholders with substantive proposals for analysis, it includes a number of specific questions related to particular aspects of these topics. The CFA invites interested parties to send written responses to these questions, in order to facilitate the analysis of the issues covered by the discussion draft.

A public consultation on the discussion draft is organized on October 11-12, 2016 at the OECD Conference Centre in Paris.

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