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:
- 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.
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