BEPS Action 4 - New Guidance on Group Ratio Rules | KPMG | CA

BEPS Action 4 - New Guidance on Group Ratio Rules and More

BEPS Action 4 - New Guidance on Group Ratio Rules

The OECD has recently updated its BEPS Action 4 report.

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This newer version contains new technical guidance regarding the OECD's recommended approach to addressing interest deductions and other financial payments used in base erosion and profit shifting. The new guidance is related to the design and operation of the group ratio rule. It also outlines approaches that countries should take to deal with risks that are posed by the banking and insurance sectors.

Group ratio rule
The group ratio is an optional supplementary rule that enables groups that are highly leveraged with third party debt to apply a group ratio rather than a fixed rate ratio. (A fixed-ratio rule limits an entity’s net interest (including third party interest) deductions to 10-30% of its EBITDA (or EBIT), excluding “tax exempt” (e.g., dividend) income). The updated report does not change the group ratio rule, but it does provide more technical details to help countries implement the rule in line with the common approach that was set out in the 2015 BEPS Action report. The update emphasizes the importance of consistent approaches to providing protection for different countries and reducing compliance costs for groups, while allowing some flexibility so that countries may take into account particular features of their tax laws and policies.

Banking and insurance sectors
The updated report examines the regulatory and commercial requirements that constrain groups from using interest for BEPS purposes, while taking into account the limits on these constraints. The OECD found that differences exist between countries and sectors, and that some countries may still face risks. According to the report, each country must now identify the risks it faces, and distinguish between the risks posed by banking groups and risks posed by insurance groups. After doing so, a country may either:

  • Exempt banking and/or insurance groups from the fixed ratio rule and group ratio rule without the need for additional tax rules if no material risks are identified, or 
  • Introduce rules to address BEPS risks, if they are found, while taking into account the regulatory regime and tax system in that country.

The updated report considers how these rules may be designed, and includes a summary of selected rules that are currently applied by other countries. In all cases, countries must determine interaction of tax and regulatory rules that apply to them, and make sure that their possible impact on groups is fully understood.

For more information, contact your KPMG adviser.

Information is current to January 10, 2017. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500.

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