The mobility and fungibility of money makes it possible for multinational groups to
achieve favourable tax results by adjusting the amount of debt in a group entity.
The 2015 Report established a common approach which directly links an entity’s net
interest deductions to its level of economic activity, based on taxable earnings before
interest income and expense, depreciation and amortisation (EBITDA). This approach
includes three elements: a fixed ratio rule based on a benchmark net interest/EBITDA
ratio; a group ratio rule which allows an entity to deduct more interest expense based
on the position of its worldwide group; and targeted rules to address specific risks.
Further work on two aspects of the common approach was completed in 2016. The first
addressed key elements of the design and operation of the group ratio rule, focusing
on the calculation of net third party interest expense, the calculation of group-EBITDA
and approaches to address the impact of entities with negative EBITDA. The second
identifies features of the banking and insurance sectors which can constrain the ability
of groups to engage in BEPS involving interest, together with limits on these constraints,
and approaches to deal with risks posed by entities in these sectors where they remain.
Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid.