This follows the announcement in October 2015 that the OECD would strengthen rules to limit base erosion involving interest deductions and other financial payments under Action 4 as part of its wide-ranging Base Erosion and Profit Shifting (BEPS) exercise.

There has been strong opposition to the plans to change the reporting rules and this final document sets out detailed technical advice to iron out any outstanding issues over lack of comparability and over-disclosure risks.

Under the new approach there will be a ‘fixed ratio rule’ which limits an entity’s net interest deductions to a set percentage of its taxable earnings before interest income and expense, depreciation and amortisation (tax-EBITDA).

At the time, the OECD admitted that ‘groups may be leveraged differently for non-tax reasons’, recommending that countries consider introduce a ‘group ratio rule’ to allow an entity to claim higher net interest deductions, based on a relevant financial ratio of its worldwide group.

The consultation sets out options for methods to:

• calculate a group’s net third party interest income;
• define of group-EBITDA; and
• deal with the impact of losses on the operation of the rule.

The document sets out some of the risks and downsides to the proposals to calculate a group’s net third party interest expenses using unadjusted figures, with the potential to create over-complex disclosures and a lack of comparability in accounts.

However, the OECD points out that ‘in some circumstances, such a change in accounting treatment may not be permitted under the relevant accounting standard. On the other hand, there is also a risk that such an approach could be manipulated to ensure that income items are not accounted for as interest and so are not included in net third party interest expense.

‘The risk of manipulation could be reduced by the inclusion of an anti-avoidance provision, but this could be difficult to apply in practice if a particular accounting treatment is permitted under the relevant accounting standard,’ the consultation document states.

The OECD is also seeking feedback on how to deal with the impact on the group ratio rule of an entity with negative EBITDA in a group with positive group-EBITDA.

The discussion draft does not change any of the conclusions agreed in the initial report, but provides an additional layer of technical detail to assist countries in implementing the group ratio rule in line with the common approach.

It examines alternative approaches to key aspects of the rule and emphasises the importance of a consistent approach in providing protection for countries and reducing compliance costs for groups, while including some flexibility for a country to take into account particular features of its tax law and policy.

All work on BEPS Action 4 needs to be completed in 2016 with countries likely to introduce the new rules in tax year 2017-18.

In the UK, the second phase of a consultation on the framework and detailed rules on the treatment of deductibility of corporate interest is underway with the rules set to come into effect from 1 April 2017. It is estimated that the annual tax impact will be £1bn per annum (starting from 2017-18).

Daniel Head, partner, global transfer pricing services team at KPMG, said: ‘The quantum of this increased level of additional tax take makes this an area that cannot be ignored.

‘The new regime is a fundamental change to the way that the UK tax rules have previously treated interest for tax purposes, and for many UK groups this has the potential to result in a denial of some of their interest deductions. This will impact both the effective tax rate for the group and cash tax, which will filter through to wider financial metrics (such as earnings per share (EPS).

The closing date for response to the consultation is 16 August 2016 by email to [email protected] in Word format addressed to the International Co-operation and Tax Administration Division, OECD/CTPA.

The OECD discussion draft on the design and operation of the group ratio rule under BEPS Action 4 is available here