On July 11, 2016 the OECD released a Discussion Draft on BEPS Action 4 – Elements of the design and operation of the Group Ratio Rule. Interested parties are invited to provide comments on a discussion draft which deals with elements of the design and operation of the group ratio rule under Action 4 (Interest deductions and other financial payments) of the BEPS Action Plan.
Responses to the discussion draft should be submitted via email by August 16, 2016 at the latest.
Paragraph 117 of the final version of the report on Action 4 Limiting Base Erosion Involving Interest Deductions and Other Financial Payments indicates that the OECD will continue to conduct detailed work on the design and operation of the group ratio rule, to be completed in 2016. The discussion draft has been produced as part of the follow-up work on this issue, which focuses on:
· approaches to calculate a group’s net third party interest expense,
· a definition of group-EBITDA, and
· approaches to deal with the impact of losses on the operation of the group ratio rule.
The discussion draft includes a number of specific questions related to particular aspects of these topics. The Committee on Fiscal Affairs invites interested parties to send written responses to these questions, in order to facilitate the analysis of the issues covered by the discussion draft. Interested parties may also offer additional comments on any of the issues raised in the document.
The discussion draft discusses a.o. the following subjects:
· Introduction and background
· Calculation of net third party interest expense
o Approach 1 (To calculate a group’s net third party interest expense by using unadjusted figures from the face of a group’s consolidated income statement)
o Approach 2 (Approach 2 uses the interest income and expense figures in a group’s consolidated income statement as the starting point for calculating net third party interest expense. However, unlike under approach 1, these figures are then adjusted to include or exclude items in accordance with whether they fall within the definition of interest and payments economically equivalent to interest in Chapter 2 of the Action 4 Report)
o Approach 3 (Approach 3 to calculating a group’s net third party interest expense is a variant on approach 2 and so should give the same result. However, rather than making adjustments to the interest figures in a group’s consolidated financial statements, approach 3 requires an entity to identify all of the group’s items of income or expense which fall within the definition of interest and payments economically equivalent to interest in Chapter 2 of the Action 4 Report, and then measure these items based on how they are treated in the consolidated financial statements for the group. In some cases these values may be taken directly from the group’s consolidated financial statements but in others it may be necessary for an entity to refer to underlying accounting records.)
o Comparison of the three approaches
o Adjustments to a group’s net third party interest expense
· Definition of group-EBITDA
o Items to be included in the adjustment for interest income and expense
§ Capitalised interest
§ Fair value movements on financial instruments directly connected to a group’s debt finance
§ Net interest on a group’s defined benefit pension liability and similar post-retirement benefits
o Items to be included in the adjustment for depreciation and amortisation
o The treatment of dividend income and a group’s share of the earnings of an associate or JVE
§ The treatment of dividend income
§ The treatment of a group’s share of the profit or loss of a joint venture entity or associate under equity accounting principles
o The treatment of non-recurring items
· The impact of losses on the operation of the group ratio rule
o The treatment of entities where a group has positive group-EBITDA
§ Excluding entities with negative EBITDA from the calculation of group-EBITDA
§ Restricting the interest capacity of entities with positive EBITDA
o The treatment of entities where a group has zero or negative group-EBITDA
Furthermore an Annex containing 22 examples is attached to the discussion draft.
Click here to be forwarded to discussion draft as available on the website of the OECD, which will open in a new window.
Are you looking for other BEPS documents then have a look at our BEPS LIBRARY, which is very complete.
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