On 5 October 2015, the OECD issued its Report on ‘Limiting Base Erosion Involving Interest Deductions and Other Financial Payments’ (under the BEPS Action Plan 4). This report has been eagerly awaited because the use of interest deductibility was seen by the OECD as a key factor in base erosion and profit shifting that was being carried out by multinationals.
Briefly, the Report recommends that countries adopt the following to prevent excessive interest (and other similar payments) from arising to reduce taxable profits:
- A fixed ratio rule that would apply to restrict interest deductions claimed by an entity (or a group of entities operating in the same country) to a fixed percentage of EBITDA, suggesting a single fixed ratio for all industries of somewhere between 10% and 30%.
- Supplementing the fixed ratio rule with a worldwide group ratio rule thereby providing additional capacity to claim interest based on the external net interest/EBITDA of the worldwide group, with a possible inclusion of a 10% uplift to prevent double taxation and/or an alternative group ratio rule based on debt equity levels.
The Report recommends countries adopt:
- a de minimis threshold which carves-out companies which have a low level of net interest expense (to be applied to the total net interest expense of the local group)
- an exclusion for interest paid to third party lenders on loans used to fund public-benefit projects, subject to conditions
- the carry forward/back of disallowed interest expense and/or unused interest capacity (within limits).
The OECD is further considering the mechanics of a worldwide group ratio rule, and also have singled out the banking and insurance sectors as having specific features that must be further looked into.
HM Treasury, which is broadly supportive of the proposed recommendations, published on 12 October a consultation paper (https://www.gov.uk/government/consultations/tax-deductibility-of-corporate-interest-expense/tax-deductibility-of-corporate-interest-expense-consultation). Responses are requested by 14 January 2016.
Comment
It seems likely that the UK will amend domestic legislation in line with these restrictions, possibly from 1 April 2017.
The rules are unlikely to impact stand alone domestic groups but subject to any de minims companies which are members of international groups are likely to see further restrictions on interest deductions.
The UK oil industry already faces additional restrictions on the ability to claim interest deductions within the ring fence as compared to other UK industries. As a result the industry was able to obtain secure exemption from the UK World Wide Debt cap rules (section 318 TIOPA 2010) that were introduced in 2010. We therefore suggest companies should make representations that any further restrictions introduced would be inappropriate for ring fence debt. Please contact your usual CWE contact for further assistance.