Intra-Group Debt at the Crossroads : Stand-Alone versus Worldwide Approach

Cross-border intra-group debt represents a significant proportion of total global monetary flows. Responding to tax base erosion from related party interest deductions, countries have introduced domestic rules against “interest stripping” but the heterogeneity of these rules leads to double taxation and double non-taxation. The OECD's 2013 Base Erosion and Profit Shifting (BEPS) Action Plan identifies debt deductions as “Action Item 4”, for reform by the end of 2015. This article surveys the existing approaches, from stand-alone to worldwide (or group-wide) ratio rules. The author concludes that the worldwide approach is preferable, and recommend that more countries adopt such a rule, limiting the local leverage to the third-party leverage of the worldwide group. Such a rule is principled, given the fungibility and other unique features of finance, can draw upon existing rules in three countries and achieves the BEPS project aim of eliminating a large capacity for profit shifting