The document discusses approaches to address base erosion and profit shifting (BEPS) involving interest in the banking sector. It notes that while the BEPS project established rules to address interest deductions, these may not be effective for banks due to their unique features. The document outlines some of these key features of banks, including that interest income and expenses are core to their business model. It also discusses potential BEPS risks involving interest in the banking sector and recommends that countries implement targeted rules to address identified risks while considering existing banking regulations.

1. Approaches to address BEPS involving interest in
the banking sector: a flaw in the BEPS project?
CORPORATE TAX BASE:
TOWARDS A EUROPEAN NEW DEAL?
5 - 6 May 2017
Turin - Pollenzo
Federica Pitrone
International Tax Manager - Intesa Sanpaolo
(I express my views in my personal capacity)

2. AGENDA
1. Setting the scene: brief comments on Action 4
2. The banking sector and its peculiarities
3. Potential BEPS risks involving interest deductions in
the banking sector and approaches to address such
risks
4. Conclusions
2

3. Development of recommendations regarding best practices in the design of rules to prevent
base erosion through the use of interest expense, and other financial payments that are
economically equivalent to interest payments.
e.g. through the use of related-party and third-party debt to achieve excessive interest
deductions or
to finance the production of exempt or deferred income.
Objective of the work on Action 4: to identify coherent and consistent solutions to address
BEPS using interest and payments equivalent to interest:
consistent approach utilizing international best practices is essential if concerns surrounding
the use of interest in base erosion and profit shifting are to be addressed.
To make compliance with rules in multiple countries simpler and cheaper.
To remove distortions, reduce the risk of unintended double taxation and increase fairness
and equality between groups.
3
SETTING THE SCENE: BRIEF
COMMENTS ON ACTION 4

4. 4
SETTING THE SCENE: BRIEF
COMMENTS ON ACTION 4

5. The report on Action 4 of the BEPS project establishes a common approach to
tackling BEPS involving interest (i.e. the fixed ratio rule and group ratio rule), but
highlights that a different approach is needed to address risks posed by entities in the
banking and insurance sector, taking into account their particular features.
According to the Action 4 Report countries may exclude entities in banking
and insurance sectors from the scope of this common approach.
The same reasoning is followed at the European Union level - the ATAD
directive adopted on 12 July 2016 allows the EU Member States to exclude
financial undertakings from the scope of the EU interest limitation rule.
5
SETTING THE SCENE: BRIEF
COMMENTS ON ACTION 4

6. An appropriate response to BEPS risks posed by banks (if identified) should be take into account
the following key features:
The role and nature of interest: for banks, interest income and expense are operating income
and play a role comparable with revenue and cost of sales for entities in non-financial sectors =>
fundamentally different from other businesses.
Regulatory capital rules and commercial constraints: this requires banks to hold minimum amounts
of equity and restrict their ability to place an excessive level of debt in some entities or to use debt
to fund equity investments in subsidiaries.
Interest income vs. interest expenses: entities engaged in banking business will have in the majority
of cases net interest income rather then net interest expense => fixed ratio rule and group ratio
rule unlikely to be effective (possible exception: groups with significant investment banking or similar
activities)
6
THE BANKING SECTOR AND ITS
PECULIARITIES

7. Countries have identified that the main general BEPS risks involving interest in
the banking sectors they encounter relate to
i. excessive interest deductions in entities that are part of a group with a
bank company, and
ii. banks or insurance companies, and entities in a group with a bank or
insurance company, using interest to fund non-taxable income.
7
POTENTIAL BEPS RISKS INVOLVING INTEREST
DEDUCTIONS IN THE BANKING SECTOR AND
APPROACHES TO ADDRESS SUCH RISKS

8. Recommendations of the OECD
Each country should identify the specific risks it faces and where BEPS
risks involving interest are identified, a country should introduce rules
which are appropriate to address these risks, taking into account the
regulatory regime and tax system in that country.
Targeted rules (e.g. to counter artificial loans, back to back
arrangements, excessive interest paid to a related party and so on)
8
POTENTIAL BEPS RISKS INVOLVING INTEREST
DEDUCTIONS IN THE BANKING SECTOR AND
APPROACHES TO ADDRESS SUCH RISKS

9. 9
CONCLUSIONS
Green light Yellow light Red flag
Opportunity for dialogue offered by
the OECD in relation to its discussion
draft on the approaches to address
Base Erosion and Profit Shifting
(“BEPS”) involving interest in the
banking and insurance sectors dated
28 July 2016
Do we really need new tax rules
(GAARs, TP rules)?
Unilateral measures?
“if the Action Plan fails to develop
effective solutions in a timely manner,
some countries may be persuaded to
take unilateral action for protecting
their tax base, resulting in avoidable
uncertainty and unrelieved double
taxation” OECD(2013)
As the discussions in this field are not
yet sufficiently conclusive in the
international and Union context, it is
not yet possible to provide specific
rules in the financial and insurance
sectors and Member States should
therefore be able to exclude them
from the scope of interest limitation
rules. (preamble of ATAD Directive,
(9))
Rules to protect countries from BEPS
should not weaken the
effectiveness of capital regulation
in providing protection against default,
insolvency and a future financial crisis
Most of the items: target of the work of
other Actions (e.g. Action 2)
Double taxation?

10. 9
CONCLUSIONS
Green light Yellow light Red flag
Opportunity for dialogue offered by
the OECD in relation to its discussion
draft on the approaches to address
Base Erosion and Profit Shifting
(“BEPS”) involving interest in the
banking and insurance sectors dated
28 July 2016
Do we really need new tax rules
(GAARs, TP rules)?
Unilateral measures?
“if the Action Plan fails to develop
effective solutions in a timely manner,
some countries may be persuaded to
take unilateral action for protecting
their tax base, resulting in avoidable
uncertainty and unrelieved double
taxation” OECD(2013)
As the discussions in this field are not
yet sufficiently conclusive in the
international and Union context, it is
not yet possible to provide specific
rules in the financial and insurance
sectors and Member States should
therefore be able to exclude them
from the scope of interest limitation
rules. (preamble of ATAD Directive,
(9))
Rules to protect countries from BEPS
should not weaken the
effectiveness of capital regulation
in providing protection against default,
insolvency and a future financial crisis
Most of the items: target of the work of
other Actions (e.g. Action 2)
Double taxation?