The OECD has participated in recent regional meetings in Eurasia and Latin America, among others, following through on its plan to assist developing countries with the BEPS initiative. The OECD publication entitled “The BEPS Project and Developing Countries: From Consultation to Participation” and a summary of the Latin America meeting are provided for reference.
The summary of the regional meetings highlights important trends, indicating alignment and future deviations from the new OECD guidelines.
The Latin America summary observes the region does not approve of unilateral legislation for the interest initiative, noting individual countries should wait for final guidelines to ensure alignment.
In contrast, the region expressed concerns of their administrative capacity to implement the automatic exchange of information procedures. However, the countries also expressed a desire to access country-by-country reports, assess whether such information is satisfactory, and evaluate the proposed filing threshold for regional MNE groups. These statements indicate a potential shift from the new guidelines to possibly implement standards that are region specific, and thereby non-conforming with the BEPS guidelines.
Accordingly, MNE’s should follow these meetings closely to provide flexibility for future BEPS compliance that will be more complex than it now appears.
Slovakia joins the march of others, including Germany and S. Africa, that have adopted EBITDA limitations for interest deductions. Slovakia limits interest to 25% of EBITDA, with no carryovers allowable. The 2015 tax amendments also extend transfer pricing rules to domestic related party transactions, as well as potential loss of future benefits for net operating loss carryovers.
EY’s Global Tax Alert summarizing these changes is included for reference:
BEPS continues to focus on interest deductions and limiting or allocating such deductions based on the premise that they are a base eroding mechanism that should not be fully deductible. However, such limitation introduces a mismatch of the related party’s interest income that is not similarly limited, thereby increasing the incidence of unfair taxation. This argument is contrary to the hybrid entity mismatch rules whereby a deduction is not allowable for income that is not includible, or limited in the case of a double deduction situation. Accordingly, BEPS seeks not only to create a neutral result for a deduction and the related income, but BEPS disallows the tax benefits of common intercompany financing arrangements while (unfairly) retaining domestic benefits for full taxation of related party interest income to increase the country’s domestic fisc.
Countries that have adopted EBITDA limitations will not be incentivized to change such legislation for the final OECD BEPS guidelines re: interest, thereby causing further complexity, a potential lack of global consistency and avenues of deviation for BEPS implementation.
MNE’s operating in such countries should review the financial and tax impact of the new rules, noting this will be a significant trend in the future that changes the manner in which debt financing is structured in the worldwide organization.