BEPS - Action Point 4 On Interest Deductions And Other Financial Payments

The OECD released its public discussion draft on Action Point 4 of the Action Plan on Base Erosion and Profit Shifting (hereafter "BEPS") concerning interest deductions and other financial payments.

According to the OECD, tackling BEPS requires a broader approach to the definition of "interest", in order to limit the risks of new rules being circumvented.

As such, the OECD believes that payments (i) on all forms of debt, (ii) that are linked to the financing of a company and (iii)that are determined by applying a fixed or variable percentage to an actual or notional principal over time, should be included.

This broader concept also includes so-called "economically equivalent payments" such as arrangement fees and guarantee fees as well as the non-limitative list below:

amounts equivalent to interest paid under derivative instruments related to an entity's borrowings; foreign exchange gains and losses on borrowings; or amounts under alternative financing arrangements, such as Islamic finance. The OECD believes that the most appropriate way to tackle BEPS is to set rules that limit interest deductibility (interest cap rules) based on the amount of interest expenses. In addition, the OECD deems the use of the net position as the interest cap criteria (i.e. that the interest income should also be taken into account) to be the most sensible. In other words, solely the part of the interest expenses that exceeds the interest income should be taken into account for the interest cap. As a result, net interest income recipient entities, such as banks, may remain unconstrained by such cap.

Taking an entity's worldwide group into account for an interest cap rule is also favoured by the OECD...