Limiting Base Erosion

S. 3701. Introduction

The purpose of the work that the OECD envisaged to accomplish under Action 4 of the Action Plan on Base Erosion and Profit Shifting (BEPS Action Plan, OECD, 2013) was to 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 of the OECD culminated in a Final Report published in 2015, entitled Limiting Base Erosion Involving Interest Deductions and Other Financial Payments (hereinafter “the Final Report”).

The Final Report offers OECD Member countries (among which are all the EU Member States) a “toolbox” of measures to implement in their domestic tax system in order to curb the use of interest deduction to create base erosion and profit shifting. Although an internationally coordinated implementation of the Final Report’s best practice in all the OECD Member countries is deemed essential for its success, the Final Report leaves discreti...