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 recommended approach ensures that an entity’s net interest deductions are directly
linked to its level of economic activity, based on taxable earnings before deducting
net interest expense, depreciation and amortisation (EBITDA). This approach includes
three parts: 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 in certain
circumstances based on the position of its worldwide group; and targeted rules to
address specific risks. A country may choose not to introduce the group ratio rule,
but in this case it should apply the fixed ratio rule to multinational and domestic
groups without improper discrimination.
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.