On 11 July 2016, the Organisation for Economic Co-operation and Development (OECD) published a discussion document on the group ratio rule that forms part of its proposals on interest deductibility (Action 4 of the OECD’s base erosion and profit shifting (BEPS)).
The OECD’s proposals on Action 4 included the possibility of an entity being able to deduct interest expense up to its group ratio of net third party interest to EBITDA (the group ratio rule) if that were higher than the so-called fixed ratio rule (being a fixed ratio of profit, measured by EBITDA). In October 2015, when the OECD published its “final” BEPS reports, it did state that further work would be required in certain areas, including with regard to the group ratio rule.
This discussion paper is intended to provide “an additional layer of technical detail to assist countries in implementing the group ratio rule”.
The paper gives a number of options for calculating the net third party interest expense of a group. The OECD’s preferred approach, broadly, is to make the calculation by identifying both interest income and expense and payments economically equivalent to interest (whether starting with the group’s financial statements or not). The paper also considers the definition of group EBITDA.
The proposals are complex and, somewhat inevitably, seek a fine balance between ensuring international conformity with the proposals and giving countries some leeway in terms of implementation.
The UK domestic legislation to implement the Action 4 proposals is due to take effect from 1 April 2017. One view is that the UK’s implementation is somewhat premature, given the ongoing work being undertaken by the OECD.
The discussion paper can be viewed here.