The Organisation for Economic Cooperation and Development (OECD) has released its final report on “Action 4”, which is a part of a number of measures aiming to curb tax avoidance.
The OECD’s package of measures is destined to combat the so called “Base Erosion and Profit Shifting” (BEPS). The BEPS project lead to the formation of a 60 countries’ alliance, representing the most convincing effort in history that seeks to harmonise the tax laws applied in multiple jurisdictions.
More specifically, the BEPS project aims to curb tax avoidance by global multinationals, which are able to structure their operations around the world and accumulate earnings at low tax rates. Governments will need to adopt an international tax framework, which arises from the OECD model tax treaty.
Action 4 focuses on the usage of third party, related party and intragroup debt either to obtain “excessive deductions” or “finance the production of exempt or deferred income”.
The final report on Action 4, which is part of the OECD’s total output, sets out the countries the best practice approach to the aim of erosion prevention of the tax base, through the use of interest expense. It recommends an approach based on a fixed ratio rule, which can be supplemented by another ratio based on a worldwide group, or even by specific targeted rules.
It is certain that more technical work on these areas of the recommended approach will follow, in relevance to the worldwide group ratio rule and the specific rules, to deal with risks posed by insurance and banking groups. The finalisation of OECD’s work is expected to occur throughout 2016.