OECD: Updated guidance released, BEPS Action 4 | KPMG | GLOBAL
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OECD: Updated guidance released, BEPS Action 4

OECD: Updated guidance released, BEPS Action 4

The Organisation for Economic Cooperation and Development (OECD) today released an updated version of the base erosion and profit shifting (BEPS) Action 4 report (Limiting base erosion involving interest deductions and other financial payments). Today's release includes further guidance in two areas:


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  • The design and operation of the group ratio rule
  • Approaches to deal with risks posed by the banking and insurance sectors

Read the OECD release

Design and operation of the group ratio rule

The 2015 BEPS Action 4 report set out a common approach to address BEPS involving interest and payments economically equivalent to interest. This included a "fixed ratio rule" that limits 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 report included a detailed outline of a rule based on the net third-party interest/EBITDA ratio of a consolidated financial reporting group, and provided that further work would be conducted in 2016 on elements of the design and operation of the rule. 

Today's updated report does not change any of the conclusions agreed in 2015, but provides a further layer of technical detail to assist countries in implementing the group ratio rule in line with the common approach. According to today’s OECD release, this emphasizes the importance of a consistent approach in providing protection for countries and reducing compliance costs for groups, while including some flexibility for a country to take into account particular features of its tax law and policy.

Banking and insurance sectors

The 2015 BEPS Action 4 report also identified factors that suggested that the common approach may not be suitable to deal with risks posed by entities in the banking and insurance sectors. 

Today's updated report examines regulatory and commercial requirements that constrain the ability of groups to use interest for BEPS purposes, and limits on these constraints. Today’s OECD release states that overall, a number of features reduce the risk of BEPS involving interest posed by banking and insurance groups, but differences exist between countries and sectors, and in some countries risks remain. Each country is to identify the risks it faces, distinguishing between those posed by banking groups and those posed by insurance groups. 

  • When no material risks are identified, a country may reasonably exempt banking and/or insurance groups from the fixed ratio rule and group ratio rule without the need for additional tax rules. 
  • When BEPS risks are identified, a country is to introduce rules appropriate to address these risks, taking into account the regulatory regime and tax system in that country. 

The updated report considers how these rules may be designed, and includes a summary of selected rules currently applied by countries. In all cases, countries are to determine that the interaction of tax and regulatory rules and the possible impact on groups is fully understood.

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