In comment letters released February 11, business representatives argued that the OECD should not adopt a proposal to limit MNE interest deductions using a group-wide test, as proposed in a discussion draft released under OECD base erosion and profit shifting (BEPS) plan.
Just over 100 comment letters were released in response to the discussion draft, issued December 18 under action 4 of the BEPS plan. Almost all the commentators represented business interests.
The draft would put limits on MNE interest deductions using either group-wide tests, a fixed ratio test, or through some combination of the tests.
Under the proposed group-wide tests, a multinational group’s net interest deduction would be limited to the group’s net third-party interest expense. The deduction would be allocated among companies based on a measure of economic activity.
The fixed ratio test would limit a company’s interest deductions to an amount determined by applying a fixed benchmark ratio to an entity’s earnings or asset value on a jurisdiction-by-jurisdiction basis.
Many business commentators argued that both approaches were flawed, and urged to the OECD to abandon them in favor of refining the arm’s length principle. Given the choice between the two options, though, most commentators said that a fixed ratio test was preferable to the group-wide tests.
BIAC, the OECD’s business and industry advisory group, was among commentators that argued that group-wide tests would create significant complexity and difficulties for taxpayers. The test would create a “perverse incentive to increase overall leverage, which runs counter to the lessons of the financial crisis,” BIAC argued.
BIAC said that combined approach 2 of the draft would be the best choice, but added that appropriate percentages should be used. The test would limit interest deductions using a fixed ratio, but if net interest expense exceeded that ratio, the taxpayer would then test at the global group-wide level.
BIAC also disputed the OECD’s conclusion, stated in the discussion draft, that countries that currently restrict interest deductions based on a fixed interest/EBITDA ratio may be setting the ratio too high and not effectively combating BEPS. BIAC submitted a report prepared by PwC that concludes that net interest/EBITDA ratios are much higher than those set forth in the discussion draft.
A hearing on the discussion draft is slated for February 17.
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