Business reacts to OECD group ratio rule for multinational corp interest deductions

The OECD on August 25 released 23 comment letters from business groups responding to its request for feedback on a discussion draft on the design of a group ratio rule. The rule would supplement OECD recommendations on how countries can draft laws to combat multinational tax avoidance through excessive interest deductions, providing some relief to firms that are excessively leveraged for business reasons.

The OECD’s July 11 discussion draft follows up on a final report under action 4 of the base erosion profit shifting (BEPS) plan which was prepared by the OECD and endorsed by G20 leaders last November.

The final BEPS report recommends that countries adopt laws implementing a fixed ratio test for multinationals, which limits MNE interest deductions to a fixed percentage of tax-EBITDA, but also recommends that countries consider adopting an optional group ratio test, which allows higher interest deductions. Under the group ratio rule, an entity would be allowed to deduct net interest expense up to the net third party interest expense/EBITDA ratio of the worldwide group.

The discussion draft follows up on the final BEPS report with further detail on how to craft a group ratio rule. Specifically, the draft elaborates on three options for the calculation of net third party interest expense, further defines group-EBITDA, and discusses the impact of losses on the operation of the group ratio rule.

The International Chamber of Commerce (ICC) was among commentators that argued that countries interested in adopting the group-wide test need to align their rules so the rule is adopted consistently throughout the world. The alternative would lead to double taxation and excessive burdens on companies, the ICC said.

Similarly, Will Morris, Chair of the Tax Committee at the Business and Industry Advisory Committee to the OECD (BIAC) said that the OECD should adopt more concrete and  prescriptive recommendations.

“The BEPS Project has always sought to introduce consistency between different tax systems, and an overlapping system of different rules in respect of a global test would frustrate that aim. It would also create a substantial amount of work in multiple jurisdictions for some taxpayers, with no particular benefit to tax authority revenues,” Morris said.

BIAC also argued that the OECD should adopt approach 1 in the draft for the calculation of global net interest, where an MNE would use interest and expense figures from their consolidated income statements without adjustments. Such an approach is the easiest to comply with, the BIAC said.

BIAC also said that taxpayers should be given the option to apply the more administratively complex approach in approach 2 or 3, though. BIAC’s recommendations were supported by the ICC and the United States Council for International Business (USCIB) in their comment letters.

The USCIB also argued that the draft’s recommendation that countries allow entities to apply an uplift to the group’s net third party interest expense of up to 10 percent was not generous enough. The uplift is designed to compensate for situations where it is not possible to align net interest expense and activity.

The Confederation of Swedish Enterprise, the Commercial Real Estate Finance Council Europe, and the International Alliance for Principled Taxation also argued that a larger uplift should be provided.

The following organizations also commented on the draft:

Association of Real Estate Funds , Federation of German Industries, British Property Federation, BusinessEurope, Confederation of British Industry, Confédération Fiscale Européenne, European Business Initiative on Taxation, European Public Real Estate Association, Fédération Bancaire Française, Grant Thornton UK LLP, IFA Grupo Mexicano, Japan Foreign Trade Council , Inc., Keidanren, KPMG LLP, NERA Economic Consulting, PricewaterhouseCoopers International Limited, Royal Institution of Chartered Sureyors.

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