On 22 December 2016, the Organisation for Economic Co-operation and Development (OECD) published an updated version of its report on restricting interest deductibility under Action 4 of the BEPS project. This follows on from the OECD discussion paper published in July on its proposed approach to interest deductibility in the banking and insurance sectors (see here for our commentary on this).
The final proposal made by the OECD under Action 4 of BEPS was for countries to limit an entity’s net interest deductions to a fixed ratio of the taxable income generated by the entity’s economic activities. At the time, however, the OECD recognised that further work would be needed in some areas, including the banking and insurance sectors. In July the OECD recognised that the characteristics of banks and insurers may mean that the “general” approach proposed for interest deductibility under BEPS may not be appropriate.
Part III of the updated report draws heavily on the July 2016 discussion paper. The OECD’s recommendation is that countries should seek to identify specific risks in the banking and insurance sectors. If no material BEPS risks are identified, banks and insurers should be exempted from the “fixed ratio” and “group ratio” rules. However, if risks are identified, specific rules should be enacted taking into account the regulatory and tax regimes applicable to such sectors.
The updated report can be viewed here.