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:
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:
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.
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