Slovakia joins interest limitation parade
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:
Click to access 2014g-cm4890-slovak-parliament-approves-2015-tax-amendments.pdf
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.