Guidance on the design and operation of the group ratio rule and approaches to deal with risks posed by the banking and insurance sectors.
On 22 December 2016 the OECD released an updated version of its BEPS Action 4 Report (Limiting Base Erosion Involving Interest Deductions and Other Financial Payments), which includes further guidance on two areas: the design and operation of the Group Ratio Rule (GRR), and approaches to deal with risks posed by the banking and insurance sectors. The new guidance is generally in line with the proposals in these areas consulted upon last summer.
Design and operation of the GRR
The updated guidance on the GRR can be found in Part II where there are new chapters on calculating net third party interest, calculating group Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) and addressing losses. There is also a new annex containing examples. The guidance is very much as expected based upon the OECD’s earlier discussion draft.
Banking and insurance sectors
Part III of the updated guidance contains approaches to address BEPS issues in the banking and insurance sectors. This is a follow up to the earlier discussion draft, providing more extensive guidance on applying the Fixed Ratio Rule (FRR) to entities in a group with a bank or insurance company.
This guidance continues to acknowledge the difficulties of knowing the best way to deal with groups which have activities in the Financial Service (FS) sector. There is however a much more detailed consideration of the regulatory and commercial constraints and how regulatory capital rules reduce, but do not entirely eliminate BEPS risks. The report shows a willingness to recognise that this may mean, for some jurisdictions at least, that there should be no significant tax risk in need of specific counteraction, and therefore the most straightforward approach may simply be to exempt those groups which are wholly or mainly involved in banking or insurance activities from the scope of the FRR and GRR.
For those groups which have a mixture of FS and non-FS activities, the report suggests that one approach could be to exclude both the banking and insurance entities and those with a direct connection to this activity (e.g. holding companies, service companies). However, it is recognised that this approach will need careful consideration as it is likely to be complex to implement in practice.
Groups operating in the FS sector have already questioned the need for these restrictions in a UK context given the perceived strength of the UK regulatory environment. Such questioning can be expected to become more urgent if the UK regime becomes more burdensome than that ultimately established as the international norm.
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