The OECD on July 11 released a discussion draft requesting stakeholder feedback on issues associated with drafting model tax guidance on a group ratio rule for use by countries that wish to address multinational corporation tax avoidance by limiting interest deductions.
The final version of the report on Action 4 of the OECD/G20 base erosion profit shifting (BEPS) plan recommends that countries adopt a fixed ratio rule to limit a multinational corporation’s interest deductions. The BEPS report further recommends that countries consider also introducing a group ratio rule to allow an entity in a highly leveraged group to deduct net interest expense in excess of the amount permitted under the fixed ratio rule.
Under a 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 final BEPS reports say.
The discussion draft addresses the calculation a group’s net third party interest expense, starting with the group’s financial statements and making adjustments.
The draft also addresses how to calculate group-EBITDA, and the impact of losses on the calculations.
The OECD said that there are benefits to both countries and multinationals if the group ratio rules is applied by different countries in a consistent manner.
Interested parties are invited to provide comments on the draft guidance by August 16.
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