OECD releases discussion draft on approaches to address BEPS involving interest in the banking and insurance sectors
Interested parties are invited to provide comments on a discussion draft which deals with approaches to address BEPS involving interest in the banking and insurance sectors under Action 4 (Interest deductions and other financial payments) of the BEPS Action Plan.
In October 2015, the BEPS Action 4 Report Limiting Base Erosion Involving Interest Deductions and Other Financial Payments set out a common approach to address BEPS involving interest and payments economically equivalent to interest. This included a ‘fixed ratio rule’ which limits an entity’s net interest deductions to a set percentage of its tax-EBITDA and a ‘group ratio rule’ to allow an entity to claim higher net interest deductions, based on a relevant financial ratio of its worldwide group.
The Report also identified a number of factors which suggest that a different approach may be needed to address risks posed by entities in the banking and insurance sectors. These include the fact that banks and insurance companies typically have net interest income rather than net interest expense, the different role that interest plays in banking and insurance compared with other sectors, and the fact that banking and insurance groups are subject to regulatory capital requirements that restrict the ability of groups to place debt in certain entities. The Report therefore allowed countries to exclude entities in banking and insurance groups, and regulated banks and insurance companies in non-financial groups, from the scope of the fixed ratio rule and group ratio rule, and provided that further work would be conducted in 2016 to identify approaches suitable for addressing the BEPS risks posed by these sectors, taking into account their particular characteristics.
The discussion draft does not change any of the conclusions agreed in the Report, but provides a more detailed consideration of the BEPS risks posed by banks and insurance companies and those posed by entities in a group with a bank or insurance company, such as holding companies, group service companies and companies engaged in non-regulated financial or non-financial activities. For banks and insurance companies, a limited BEPS risk has been identified and the discussion draft explores why this might be the case, the protection provided by regulatory capital rules, and the limits to this protection which differ between countries. Given the differences in risk faced by countries, the discussion draft does not propose a single approach but provides that countries should introduce rules to deal with the actual BEPS risks they face. For other entities in a banking or insurance group, the discussion draft identifies a greater BEPS risk and recommends that countries consider applying the fixed ratio rule and group ratio rule to these entities, with modification in certain cases. In each case, flexibility is provided for a country to take into account particular features of its tax law and policy. The options included in this discussion draft do not represent the consensus view of the Committee on Fiscal Affairs (CFA) or its subsidiary bodies, but are intended to provide stakeholders with substantive options for analysis and comment.
The Action 4 Report calls for this work to be completed in 2016. As part of the transparent and inclusive consultation process mandated by the Action Plan, the CFA invites interested parties to send comments on this discussion draft, including responses to the specific questions identified in the discussion draft where input is required to advance this work.