The document discusses the OECD/G20's intentions around base erosion and profit shifting (BEPS) related to debt financing structures. It outlines specific BEPS action points around limiting interest deductions and aligning transfer pricing with value creation. Key recommendations include implementing a fixed ratio rule to limit interest deductions to a percentage of EBITDA, as well as rules around intragroup financing to require appropriate substance. The BEPS package aims to restore confidence in the international tax system by ensuring profits are taxed where economic activities occur.

1. Group Finance Companies
Michael Adams
Global Head of Structured Finance Services
TMF Group
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2. Disclaimer
The views and opinions given in this presentation are those of the author, and do not
necessarily represent those of TMF Group.
Whilst I have taken reasonable steps to provide accurate and up to date information, I do not
give any warranties or representations, either express or implied, in this respect. The
information is subject to change without notice and is subject to changes in (tax) laws in
different jurisdictions worldwide.
None of the information contained in this presentation constitutes an offer or solicitation for
business, a recommendation with respect to TMF’s services, a recommendation to engage in
any transaction or legal, tax, financial, investment or accounting advice.
No action should be taken on the basis of this information without first seeking independent
professional advice.
TMF Group shall not be liable for any loss or damage whatsoever arising as a result of your
use of or reliance on the information contained herein.
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3. The Intention of the OECD/G20
OECD identified that Base Erosion and Profit Shifting (BEPS) risk arises in
three basic scenarios in relation to debt:
• Groups placing higher levels of third party debt in high tax countries
• Groups using intragroup loans to generate interest deductions in excess of
the group’s actual third part interest expense
• Groups using third party or intragroup financing to fund the generation of tax
exempt income
Also financial instruments can be used to make payments which are
economically equivalent to interest but have a different legal form
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4. Multi National Enterprises (MNE) and
Group Financing Structures
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5. Third Party Withholding Tax Structure
Direct Loan 10,000,000
Interest 5% 500,000
Withholding tax (50,000)
Parent receives 450,000
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6. Third Party Withholding Tax Structure
Creditor Loan 5.000%
BV Loan 5.125%
BV Company
Interest receipt 512,500
Withholding tax -
Interest expense (500,000)
BV profit 12,500
Parent receives 500,000
Benefit 50,000
Ignores tax paid by BV
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7. Specific Action Points raised by BEPS
• Action Point 4
• Limiting Base Erosion Involving Interest Deductions and Other Financial
Payments
• Action Point 8-10
• Aligning Transfer Pricing Outcomes with Value Creation
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8. Action 4 – Interest Deductions
• Recommendation of a Fixed Ratio Rule (FRR) of tax relief deductions for
net interest of between 10% and 30% of EBITDA, applied to all net interest
(including external debt) at an entity level
• Range is designed to allow countries to apply a fixed ratio that is low
enough to tackle BEPS risk, but recognises that not all countries are in the
same position
• Interest paid to third parties, related parties and group entities is deductible
up to this fixed ratio
• Any interest above this benchmark is disallowed
• As a minimum, applies to entities in multinational groups but can apply to a
domestic group and standalone entities
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9. Action 4 – Interest Deductions
• In addition to a FRR and recognising that some groups are highly leveraged
for non-tax reasons, a Group Ratio Rule (GRR), in addition to the FRR, is
proposed
• This would allow an entity in a highly leveraged group with net interest
expense above the country’s FR to deduct net interest expense in excess of
the amount permitted under the FRR
• Countries may also apply an uplift of 10% of the group’s third party interest
expense
• Earnings based GRR can be replaced by different group ratio rules, such as
“equity escape” rule (compares level of equity and assets between entity
and group)
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10. Action 4 – Interest Deductions
• The recommended approach will mainly impact entities with both a high
level of net interest expense and a high net interest/EBITDA ratio, in
particular where an entity’s ratio is higher than the group’s total ratio
• The rule does not restrict the ability to raise third part debt in the country
and entity most efficient for non-tax factors (credit rating, currency, access
to capital markets) and then on-lend within the group
• Supplemental rules on:
• Carry forward of disallowed interest expense
• Carry forward of unused interest capacity
• Targeted rules to prevent circumvention
• Banking and Insurance sectors need their own specific rules
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11. Action 8-10 – Transfer Pricing
• Limit the amount of interest payable to group companies lacking appropriate
substance to no more than a risk-free return on the funding provided
• Require group synergies to be taken into account when evaluating
intragroup financial payments
• Further work on the transfer pricing aspects of financial transactions will be
undertaken during 2016 and 2017
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12. Summary
• BEPS is intended to give us direction on how we should be doing business,
globally. Policy makers wish to restore confidence in the system and ensure that
profits are taxed where economic activities take place and value is created
• Three key pillars
• Coherence in the domestic rules that affect cross-border activities
• Reinforcing substance requirements
• Improving transparency as well as certainty
• The BEPS package is designed to be implemented via changes in domestic law
and practices. It is therefore still subject to local interpretation and
implementation by individual jurisdictions
• In 2016 OECD and G20 countries will conceive an inclusive framework for
monitoring, with all interested countries participating on an equal footing
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13. Michael Adams
Global Head of Structured Finance Services
TMF Group
michael.adams@tmf-group.com
www.tmf-group.com
www.istructuring.com