On July 28, 2016 the OECD released a Discussion Draft on approaches to address BEPS involving interest in the banking and insurance sectors. The Committee for Fiscal Affairs (Hereafter: the CFA) invites interested parties to provide responses to the Discussion Draft. Responses have to submitted by e-mail and by no later than September 8, 2016.

 

The report on Action 4, Limiting Base Erosion Involving Interest Deductions and Other Financial Payments, establishes a common approach to tackling BEPS involving interest, but highlights a number of factors which suggest that a difference approach may be needed to address risks posed by entities in the banking and insurance sectors. These include the fact that banks and insurance companies typically have net interest income rather than net interest expense, the different role that interest plays in banking and insurance compared with other sectors, and the fact that banking and insurance groups are subject to regulatory capital requirements that restrict the ability of groups to place debt in certain entities. The Report therefore provides at paragraphs 188 to 190 that countries may exclude entities in banking and insurance groups, and regulated banks and insurance companies in non-financial groups, from the scope of the fixed ratio rule and group ratio rule, with work to be conducted in 2016 to identify approaches suitable for addressing the BEPS risks posed by these sectors, taking into account their particular characteristics.

 

This Discussion Draft published on July 28, 2016 has been produced as part of the follow-up work on this issue, which focuses on:

·   the risks posed by banking and insurance groups to be addressed under Action 4,

·   approaches to address risks posed by banks and insurance companies, and

·   approaches to address risks posed by entities in a group with a bank or insurance company.

 

The discussion draft includes a number of specific questions (which appear in boxes) related to particular aspects of these topics. The CFA invites interested parties to send written responses to these questions, in order to facilitate the analysis of the issues covered by the discussion draft. As indicated in the final question, interested parties may also offer additional comments on any of the issues raised in the document.

 

The subjects discussed in the Dixcussion Draft include a.o.:

·   Introduction and background

o  The Action 4 Report and the common approach to tackling BEPS involving interest

o  The need to consider a different approach for entities in the banking and insurance sectors

·   The risks to be addressed through interest limitation rules

·   Banks and insurance companies

o  The role of interest in banking and insurance 

o  Excessive leverage in a bank or insurance company

§   The impact of regulatory capital rules on leverage in a bank or insurance company for tax purposes

§   Attribution of free capital to permanent establishments of banks and insurance companies

§   Addressing BEPS involving excessive leverage in banks and insurance companies, including permanent establishments

§   Applying the fixed ratio rule to a bank or insurance company

o  Interest expense funding non-taxable income in a bank or insurance company

§   Interest funding non-taxable income from an equity investment

§   Interest funding non-taxable income from an investment in a permanent establishment 

o  Targeted rules to address specific risks

·   Entities in a group with a bank or insurance company

o  The fixed ratio rule

§   The treatment of interest expense on debt supporting banking or insurance activities

§   Other issues

o  The group ratio rule

 

Annexes included in the Discussion Draft include a.o.:

·   ANNEX 2: AN OVERVIEW OF CAPITAL REGULATION IN BANKING AND INSURANCE

·   ANNEX 3: EXAMPLES

 

Click here to be forwarded to the Public Discussion Draft: “BEPS ACTION 4 APPROACHES TO ADDRESS BEPS INVOLVING INTEREST IN THE BANKING AND INSURANCE SECTORS” .

 

 

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