Background - Action 4
The OECD presented their BEPS Action Plan on July 19, 2013 which is supported by Canada and the other G20 countries. The plan establishes the areas where action will be taken to deal with perceived tax avoidance structures and will likely lead to some fundamental changes to the way both tax structuring and transfer pricing are viewed by tax authorities.
Action 4 of the OECD's Action Plan states that the OECD will develop recommendations regarding best practices in the design of rules to prevent base erosion through the use of interest expense, for example 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, and other financial payments that are economically equivalent to interest payments. The work will evaluate the effectiveness of different types of limitations. In connection with and in support of this work, the OECD says it will also develop transfer pricing guidance regarding the pricing of related party financial transactions, including:
- Financial and performance guarantees
- Derivatives (including internal derivatives used in intra-bank dealings)
- Captive and other insurance arrangements.
The OECD notes that this work will be co-ordinated with the work on hybrids and the controlled foreign corporation (CFC) rules.
In Ireland's recent 2013 budget, the Minister announced that the Finance Bill will include a change to company residence rules aimed at eliminating mismatches that may exist between tax treaty partners and that are used to allow companies to be "stateless" in terms of their place of tax residence.
Norway's' 2014 budget limits intra-group interest expense deductions to an amount that is 30% of taxable ordinary income, as adjusted for the value of tax depreciation and net interest expenses for tax purposes. This value approximates earnings before interest, taxes, depreciation and amortization (EBITDA). Hence, the calculation of the maximum deduction would be 30% of the taxable EBITDA (increased from the 25% limitation contained in the initial proposal in April 2013).
In addition, Norway proposes to increase the carryforward period to 10 years (from the five-year period contained in the April 2013 initial proposal). The proposed rule would also apply for interest expense costs on certain short-term loans (such as cash-pool arrangements).
These measures are effective January 1, 2014.
For more information, contact your KPMG adviser.
Information is current to October 22, 2013. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500