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KPMG report: BEPS involving interest in banking and insurance sectors

BEPS involving interest, banking and insurance

The OECD’s final report on Action 4 (interest deductions and other financial payments) of the base erosion and profit shifting (BEPS) project, published last year, noted that banks and insurers may not present the same BEPS risks as other kinds of entities because of the regulatory constraints imposed on them and the fact that in many cases they would be net interest recipients.


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The OECD thus indicated that additional consideration of the application of interest deductibility rules to banks and insurers was needed, and on 28 July 2016, the OECD released a discussion draft (the Discussion Draft [PDF 791 KB]) dealing with approaches to address BEPS involving interest in the banking and insurance sectors. Responses have been requested by 8 September 2016.

Recommended options

The Discussion Draft does not set forth a single recommended approach, but describes options that jurisdictions may consider in their interest deductibility rules related to banks and insurers. 

The Discussion Draft first notes that the regulatory constraints imposed on banks and insurers (excluding captive insurers and group treasury companies which are explicitly excluded from the Discussion Draft) generally provide protection against excessive leverage for tax purposes, and thus, many countries may logically choose to exempt those entities from their interest limitation rules. However, a country may decide for various reasons that its regulatory capital rules do not provide adequate protection against excessive leverage by banks and insurers (e.g., in the case of permanent establishments of banks and insurers which are not subject to regulatory capital rules). In addition, there are financing structures used by banking and insurance groups that may pose the types of BEPS risk intended to be addressed under Action 4, including using third-party or intragroup interest to fund equity investments giving rise to income that is non-taxable or taxed in a preferential manner, or entities in a group with a bank or insurer incurring excessive third-party or intragroup interest expense that is used to offset taxable interest income of the bank or insurer.

The Discussion Draft suggests that BEPS risks with respect to a bank or insurer (including a permanent establishment) are low, but if a country does identify a material BEPS risk from excessive leverage in banks and/or insurers, the country needs to consider introducing tax rules to address it. The Discussion Draft does not intend to suggest a single common approach to deal with such risks, and instead states that the final report will include a summary of the approaches currently applied by countries that may be used to identify rules that are suitable to address the specific risks countries may face. The Discussion Draft also notes that there are significant differences between banking and insurance groups in terms of their business models, their structure, how they are financed, and how they are regulated, and these also vary for groups in different countries. Thus, there is no expectation for a country to apply the same rules to both banking and insurance groups.

The Discussion Draft analyses the potential risks of groups that include banks and insurers, but also includes other types of entities, and suggests that the risk of BEPS from interest deductions may be greater in such groups.  The Discussion Draft refrains, however, from giving any firm recommendation on how the group ratio rule are to be applied to such a group if an exemption is given to banks and insurers, but does offer a range of options, including:

  • Applying the group ratio rule in an unmodified form
  • Applying it excluding amounts attributable to exempt entities or covered by the supplementary exemption (discussed above)
  • Applying a higher fixed ratio amount instead 
  • Not applying the group ratio at all to banks and insurers

The Discussion Draft gives a number of examples of how these methods may apply. The Discussion Draft solicits input on whether these are appropriate methods, and on any further issues that may be raised by such groups.

KPMG observation

Although rejecting a “one size fits all” approach to these rules is a rational choice, it will inevitably increase the risk of inconsistent approaches in different jurisdictions and overall uncertainty in this area.  Companies will need to closely monitor developments in this area around the globe as different countries begin implementation of the OECD’s BEPS recommendations.

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