group finance companies

Group Finance Companies

Michael AdamsGlobal Head of Structured Finance Services TMF Group

www.istructuring.com

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.

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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


Multi National Enterprises (MNE) andGroup Financing Structures


Third Party Withholding Tax Structure

Direct Loan 10,000,000

Interest 5% 500,000Withholding tax (50,000)

Parent receives 450,000


Third Party Withholding Tax Structure

Creditor Loan 5.000%BV Loan 5.125%

BV CompanyInterest receipt 512,500Withholding tax -Interest expense (500,000)BV profit 12,500

Parent receives 500,000

Benefit 50,000

Ignores tax paid by BV


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


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



• 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)



• 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


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


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


Michael AdamsGlobal Head of Structured Finance ServicesTMF [email protected]


mailto:[email protected]

mailto:[email protected]

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