OECD releases a discussion draft on the Group Ratio Rule (BEPS Action 4)

On July 11, 2016, the OECD released a discussion draft on elements of the design and operation of the Group Ratio Rule with respect to 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 […]

Written By ACT Team

On July 13, 2016
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On July 11, 2016, the OECD released a discussion draft on elements of the design and operation of the Group Ratio Rule with respect to 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:

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

For a copy of the discussion draft, please click on the following link http://www.oecd.org/tax/aggressive/discussion-draft-beps-action-4-elements-of-the-design-of-group-ratio-rule.pdf 

How can we help?  

For further information, please contact one of the firm’s tax partners, Stephen Balzan on [email protected] or Elaine Camilleri [email protected]. ACT can help you understand the changes to the tax rules and how these can impact your business.  

Apart from its offices in St. Julian’s Malta, ACT operates from a second office in Gozo, which is situated in the capital city of Victoria.  For an appointment in our Gozo office, please call on 00356 21378672 or send us an email on [email protected].