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OECD: Discussion draft, BEPS in banking and insurance sectors

OECD: BEPS in banking and insurance sectors

The Organisation for Economic Cooperation and Development (OECD) today released a discussion draft that concerns approaches to address base erosion and profit shifting (BEPS) involving interest in the banking and insurance sectors under Action 4 (Interest deductions and other financial payments) of the BEPS project.


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Read the discussion draft [PDF 791 KB]


The BEPS Action 4 report (released in October 2015) sets out an approach to address base erosion and profit shifting of interest and payments that are economically equivalent to interest. This includes a “fixed ratio rule” to limit an entity’s net interest deductions to a set percentage of its tax-EBITDA, and a “group ratio rule” to allow an entity to claim higher net interest deductions, based on a relevant financial ratio of its worldwide group.

The BEPS Action 4 report also identifies factors that suggest that a different approach may be needed to address risks posed by entities in the banking and insurance sectors, including:

  • Banks and insurance companies typically have net interest income, rather than net interest expense
  • The different role that interest plays in banking and insurance compared with other sectors
  • Banking and insurance groups are subject to regulatory capital requirements that restrict the ability of groups to place debt in certain entities

The BEPS Action 4 report, therefore, allows countries to exclude entities in banking and insurance groups, and regulated banks and insurance companies in non-financial groups, from the scope of the fixed ratio rule and group ratio rule. It provides that further work would be conducted in 2016 to identify approaches suitable for addressing the BEPS risks posed by these sectors, taking into account their particular characteristics.

Discussion draft

According to today’s OECD release, the discussion draft does not change any of the conclusions in the BEPS Action 4 report, but provides a more detailed consideration of the BEPS risks posed by banks and insurance companies and those posed by entities in a group with a bank or insurance company, such as holding companies, group service companies, and companies engaged in non-regulated financial or non-financial activities. 

For banks and insurance companies, a limited BEPS risk has been identified, and the discussion draft explores why this might be the case, the protection provided by regulatory capital rules, and the limits to this protection that differ between countries. Given the differences in risk faced by countries, the discussion draft does not propose a single approach, but provides that countries need to introduce rules to deal with their actual BEPS risks. 

For other entities in a banking or insurance group, the discussion draft identifies a greater BEPS risk and recommends that countries consider applying the fixed ratio rule and group ratio rule to these entities, but with modifications in certain situations. In each situation, countries are allowed flexibility to take into account particular features of their tax law and policy. 

Comments requested

Today’s OECD release notes that the options included in the discussion draft do not represent the consensus view of the Committee on Fiscal Affairs (CFA) or its subsidiary bodies, but are intended to provide stakeholders with substantive options for analysis and comment. The BEPS Action 4 report calls for this work to be completed in 2016. Interested parties are invited to send comments on the discussion draft, including responses to the specific questions identified in the discussion draft. Comments are due by 8 September 2016.

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