It has been noted that multinationals frequently employ excessive interest deductions as a conduit to transfer their profits out of the minor jurisdictions. On April 18, 2018, OECD and Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF) jointly issued a discussion draft on Limiting the Impact of Excessive Interest Deductions on Mining Revenues.
This draft is built on the basis of BEPS Action 4, intending to guide tax officials on how to strengthen their defences against BEPS. The draft identifies typical debt instruments and arrangements used with base eroding consequence, as well the challenges to cope with these practices, including debt “push down”, loan terms contingent on host country tax law, determination of interest rate mark up, use of hybrid instrument, assets purchases embedded in finances. OECD and IGF point out the possible capacity constraints, suggesting that simple and clearly designed measures should be prioritised.
In addition to best practice defined in BEPS Action 4, the draft also listed other alternatives, including the interest rate caps, interest withholding taxes(IWT), the use of arm’s length principle in related transactions, thin capitalisation rules, and proportionate deductibility. On the integrity to the domestic tax system, the draft provides several supplementary rules and considerations that are not specific to interest deductions, such as symmetrical treatment of denied interest expenses principle, anti-abuse provisions with additional penalties to deter particularly aggressive structures, and Preventing Treaty Shopping to avoid IWT under BEPS Action 6.
Comments on the draft are invited from interested stakeholders by May 18, 2018. A version in French will also be released in the coming weeks.
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