OECD release discussion document on GRR | KPMG | UK

OECD release discussion document on GRR under BEPS Action 4

OECD release discussion document on GRR

There are key differences between HMT’s consultation and the OECD’s proposal of how the Group Ratio Rule should be applied.


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On 11 July 2016, the OECD published its discussion document (OECD condoc) in relation to the elements of the design and operation of the Group Ratio Rule (GRR). This document is part of the wider Action 4 BEPS initiative to prevent Base Erosion and Profit Shifting (BEPS) via interest and similar payments.
The release of this document comes at a time when the UK is already in a consultation period in relation to HMT’s response to the Action 4 proposals and HMT has already issued its own interpretation of how the GRR should be applied (UK condoc). In this article we carry out a high level comparison between the two proposals.

The Action 4 BEPS recommendations included a common approach to tackling BEPS involving interest and similar payments through the use of a fixed ratio rule (FRR) which limits interest deductions to a percentage (recommended to be between 10 percent to 30 percent) of a group’s EBITDA. It also proposed an optional GRR which would allow an entity in a highly leveraged group to deduct net interest expense in excess of the amount permitted under the FRR based on a relevant financial ratio of its worldwide group (net third party interest expense/EBITDA).

The OECD condoc contains a detailed outline of the key elements of the design and operation of this rule and asks 14 questions related to particular aspects of this topic. Written responses are requested to be submitted by 16 August 2016, which is after the UK consultation closes on 4 August 2016

The OECD condoc covers three main topics:

  • Approach to calculate a group’s net third party interest expense (NTPIE);
  • Approach to defining group-EBITDA; and
  • Approach to address the impact of loss making entities on the operation of the rule.

The questions relating to the proposals are designed to understand the practical issues that could arise as a result of the proposals, as well as ensuring that a country’s tax policy goals are considered.

The key differences between the UK and OECD condocs are as follows:

  • The OECD condoc proposes three methods to calculate the NTPIE, whereas the UK condoc proposes only one. Approach two of the OCED condoc is most similar to the UK condoc however there are differences between what is specifically explicitly included/ excluded. One key difference is that the OECD condoc excludes fair value gains or losses on financial instruments when determining NTPIE;
  • The OECD condoc recommends that options are included to apply an uplift of up to 10 percent of the group’s NTPIE in certain circumstances, as well as including the group’s share of the NTPIE of an associate or JV. The UK proposals do not;
  • There are also differences to the calculation of EBITDA. Again, the OECD condoc explicitly excludes fair value gains and losses on a group’s debt instruments in calculating EBITDA to minimise volatility, whereas the UK condoc does not mention this; and
  • The proposed treatment of applying the GRR where there are loss makers in either a positive or negative EBITDA group also has differences. The OECD condoc includes a proposal where entities with negative EBITDA are excluded from the calculation of group EBITDA whereas the UK condoc sets out two optional approaches.

Consideration of the OECD condoc is key to understanding if any of the OECD proposals could be beneficial, and therefore warrant inclusion in representations responding to the UK condoc. As a reminder, these are due by 4 August 2016.


For further information please contact :

Daniel Head

John Monds 

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