We understand that the work undertaken for these Actions will be published in two reports: one covering the documentation guidance including Country-by-Country Reporting, and one bringing together the rest of the outputs. A discussion draft was published in December 2014, and now we expect to see a lot of changes shifting the emphasis back to the importance of the contract. The agreed text is expected to provide that appropriate amounts have to be paid for existing Intellectual Property (‘IP’), that the hard to value IP rules will apply and that contributions should be based on value not cost.
Recommendations under Action 4 are expected to be of interest to many clients as there has been much discussion as to how changes can be both effective from a BEPS perspective whilst balancing commercial requirements. Our expectation is that the recommendation will be for a fixed ratio restriction (‘FRR’) for tax relief for net interest of 10% to 30% of Earnings Before Interest, Taxes, Depreciation and Amortization (‘EBITDA’), with most countries expected to select in the range of 20% to 30%. We anticipated that the main rule should include an ‘escape clause’ to allow some level of carry forward (or back) of unused tax relief forward against future (or prior) years profits. We hope that the recommendations will include options to remove some financing from the main rule, such as a potential public benefit exemption, and if this is the case, the UK is expected to be interested in adopting such an option.
Our expectation is that the OECD deliverable will include best practice CFC rules rather than setting out a minimum standard. If this is the case, the UK is not expected to have to make significant changes to current rules.