Secretariat
Committee on Fiscal Affairs
Organisation for Economic Co-operation and Development

Keidanren hereby submits its comments on the OECD public discussion draft "BEPS Action 4: Interest Deductions and Other Financial Payments" published on December 18, 2014.

1. Introduction

Keidanren generally supports the OECD's initiatives to prevent base erosion and profit shifting ("BEPS"). We are aware that, although many developed countries have taken measures of some kind against カジノ シークレット 無料 ボーナスroblem of BEPS using interest and other financial payments that this public discussion draft addresses, further discussions and actions are needed to stop カジノ シークレット 無料 ボーナスrevalence of BEPS. From that standpoint, we endorse カジノ シークレット 無料 ボーナスroactive analysis and review made by the OECD for カジノ シークレット 無料 ボーナスublic discussion draft.

However, most companies make financing naturally in an economically most reasonable way, according to the needs for business activities. Most companies make financing for the purpose neither of tax avoidance nor tax merit. Therefore, when translating this and other BEPS Actions into concretカジノ シークレット 無料 ボーナスules, it is absolutely imperative to ensure that measures to be instituted to prevent tax avoidance will neither hamper ordinary business activities nor create an excessive administrative burden. The OECD's proposals for group-widカジノ シークレット 無料 ボーナスules in this public discussion draft appear innovative on paper by incorporating the latest theories; but they seem to be insufficiently targeted, and too mechanical and impractical to be adopted in thカジノ シークレット 無料 ボーナスeal world. Should such widely applicablカジノ シークレット 無料 ボーナスules be established, taxpayers and tax administrations that have had nothing to do with BEPS will be affected by and need to address thosカジノ シークレット 無料 ボーナスules. In addition, compliance with group-widカジノ シークレット 無料 ボーナスules will dramatically increase the administrative burdens on taxpayers and tax administrations.

In view of these points, we propose the following: countries that have no existing rules for BEPS using interest should start with considering the introduction of a fixed ratio rule; and countries with such rules already in place should first review whether those existing rules work effectively, and then, if there are still needs for introducing a group-widカジノ シークレット 無料 ボーナスule, it should be cautiously designed with due attention to linkage and consistency with the existing ones.

From this perspective, we submit the following comments:

2. Problems of Group-Widカジノ シークレット 無料 ボーナスules

Although group-widカジノ シークレット 無料 ボーナスules may be theoretically clear, their application in thカジノ シークレット 無料 ボーナスeal world requires the following problems to be solved; otherwise, thカジノ シークレット 無料 ボーナスules can hardly be deemed the best practice.

• Even within the same corporate group, financing methods taken by individual companies vary. If a group-widカジノ シークレット 無料 ボーナスule is applied mechanically, individual companies will lose some latitude in financing, which may affect sound business activities and financial markets as well. Careful consideration should be given to whether group-widカジノ シークレット 無料 ボーナスules are an excessive measure that may have an adverse impact on corporate activities and financial markets, going beyond the purpose of preventing base erosion.

• Suppose a corporate group makes a concerted effort to grow without debt, by utilizing shareholders' equity effectively or with financial subsidiaries in a group. Under group-widカジノ シークレット 無料 ボーナスules, due to the group's third party interest expense being small, a limit on interest deductions for each group company is reduced. This treatment is inappropriate as it may induce companies to issue bonds that would be otherwise unnecessary, to external investors.

• It remains unclear whether group-widカジノ シークレット 無料 ボーナスules are compatible with cash management systems. In reference to this point, Paragraph 138 in Section G of Chapter VIII of the public discussion draft states, "The application of a group-widカジノ シークレット 無料 ボーナスule should not impact the ability of a group to manage its third party balances through cash pooling." However, with what considerations rules should be applied and their other details are not specified. More specific details would be needed for further consideration.

• How group-widカジノ シークレット 無料 ボーナスules are linked with transfer pricing taxation should be clarified. In some cases, a company that is not allowed to claim interest deductions under group-widカジノ シークレット 無料 ボーナスules may still have to pay interest to another group company according to the arm's length principle from the perspective of complying with transfer pricing tax rules. Such a treatment which limits interest payments is particularly unreasonable.

• If REITs and other pass-through entities that are permitted in a widカジノ シークレット 無料 ボーナスange of countries become subject to taxation under group-widカジノ シークレット 無料 ボーナスules, it is highly likely that their interest payments will be severely restricted. Furthermore, once interest deductions arカジノ シークレット 無料 ボーナスestricted, funds for dividend payments decrease correspondingly. We are gravely concerned that this may undermine the benefits of pass-through entities and deteriorate the liquidity of REITs and other financial instruments in markets.

• Even in a corporate group in which local subsidiaries make financing decisions on their own, a limit on each company's interest deductions is determined on a group-wide basis. This may result in the narrower discretion and weaker financial management function of local subsidiaries. For example, even though local subsidiaries autonomously make financing from external debt for カジノ シークレット 無料 ボーナスurpose of capital investments, their limit of interest deduction is determined by a relation to other group entities. Therefore, it may lead to narrow options to raise funding. Consequently, companies are forced to choose equity financing. Eventually it runs counter to helping nurture and build the capacity of management and finance personnel in other countries especially in developing countries.

• If foreign exchange gains and losses on borrowings are included within the scope of interest expense as stated in paragraph 35 of the public discussion draft, the amount of interest will vary depending on the taxpayer's reporting currency, making unified measurement difficult. Also, preparers will be unable to reflect in tax returns the borrowings and other financing made in multiple currencies without the harmonization among countries of specific rules, especially thosカジノ シークレット 無料 ボーナスegulating in which currency measurement should be made and which exchangカジノ シークレット 無料 ボーナスate should be used in that case.

• If data on interest expense for accounting purposes or EBITDA is used, the convergence of accounting standards will also bカジノ シークレット 無料 ボーナスequired. Especially, the treatment of derivatives will demand detailed rules.

• As the amount and extent of interest may vary depending on the treatment and interpretation of interest in each country, group-widカジノ シークレット 無料 ボーナスules will lead to an unstable system and drastically increase the administrative burden. Specifically, companies will bカジノ シークレット 無料 ボーナスequired to track the basis for interest allocation while making adjustments for consolidated reporting, taxation periods, accounting standards, and differences between accounting and tax figures. The administrative burden and difficulties of calculation demanded by these tasks will virtually make it impossible for companies to cope with them.

3. Support for Fixed ratio rule but Need to Modify

As a result of above, we suppose that a fixed ratio approach on a jurisdiction-by-jurisdiction basis is preferable to group-wide tests.

(1) Benchmark ratio

With regard to a benchmark ratio underlying a fixed ratio rule, the public discussion draft states that thカジノ シークレット 無料 ボーナスatios of 30 to 50 percent currently applied by various countries may be too high to be effective in preventing BEPS. However, in light of the purpose of addressing risk posed by BEPS that deviates from the substance of corporate activities, it is not appropriate to recommend such a low benchmark ratio as to affect numerous multinational enterprises doing business in compliance with rules and regulations.

The best approach would be for each country to set the most appropriatカジノ シークレット 無料 ボーナスatio on its own after careful and thorough discussions taking into account the state of domestic companies, such as the use of BEPS, management and financial conditions, and possibility of using BEPS. Particularly, setting a benchmark ratio at below 30 percent may cause disruption, as 30 percent or so is now adopted in many countries. Also, attention should be paid to the possibility that setting low benchmark ratios globally may have an especially negative impact on the growth of developing countries with high interest rates.

(2) Basis for measurement

As a basis for measuring economic activity under a fixed ratio rule, カジノ シークレット 無料 ボーナスublic discussion draft refers to two possibilities: assets and earnings including EBITDA. In this respect, it is preferable that taxpayers should be given a choice to use either assets or earnings.

Choosing assets, however, entails a challenge because the calculations will be difficult if intangibles are included in the basis. In particular, the treatment of self-created intangible assets and self-created goodwill will require careful consideration. On the other hand, if choosing earnings as the basis, the company will be greatly affected by fluctuations in business performance and other factors, but this problem will bカジノ シークレット 無料 ボーナスesolved by instituting a system whereby disallowed interest expense can be carried forward into future periods. Earnings reflect the substance of the company's business activities more accurately, and are currently adopted as the basis for a fixed ratio rule more widely, than assets. In view of these, each country should be allowed to design its own rule. In addition, if choosing earnings, it should be taken into consideration that choosing earnings may deepen a recession because a reduction in the ability to report an interest deduction due to a decrease in earnings could lead to a decrease in the incentive to borrow in steep recession periods.

4. Evaluation for mixed approaches

Approach 1 that is centered on group-widカジノ シークレット 無料 ボーナスules has a number of problems as explained in Section 2. Therefore, it might be said that influences of economic activities and the administrative burden of taxpayers could be less damaged in Approach 2 which is centered on the fixed ratio rule.

However, although approach 2 adopts a fixed ratio rule as the general rule, and applies a group ratio rule as a carve-out from the general rule, room for application of a group ratio rule should be limited to the extent possible, and it would be important to set the fixed ratio in a practical level, given especially the problems involved in group-widカジノ シークレット 無料 ボーナスules as described above. From the perspective of ensuring stability in rules and transactions, it is also desirable to introduce a targeted rule that clarifies the mutual targets based on the existing and widely-used tax system in each country, for the purpose of addressing the kinds of transactions conducted with the clear intention of BEPS.

5. Other Issues

(1) The Treatment of Non-deductible Interest Expense and Double Taxation (Chapter XII)

カジノ シークレット 無料 ボーナスublic discussion draft proposes that non-deductible interest expense be allowed to be carried forward. We support this proposal, and request that the carryforward period be determined by each country. When designing this system, each country should allow a sufficient period of time, bearing in mind that theoretically, non-deductible interest can be carried forward indefinitely and considering a balance with the ledger retention period under domestic law. It is desirable that such a system also permits a carryback of disallowed interest expense into earlier periods and a carryforward of unused capacity to deduct interest into future periods.

(2) Who Should a Rule Apply to? (Chapter V)

The public discussion draft states that interest limitation rules should also apply to a related party that directly or indirectly holds a 25 percent or greater investment in the company concerned. However, in many cases, a related party holding a 25 percent or more stake in a company cannot be said to substantially control the company. Another concern is that it is not easy to garner information on interest and other financial transactions from a company that the taxpayer does not directly control or overseカジノ シークレット 無料 ボーナスegarding business and other activities. Thカジノ シークレット 無料 ボーナスelated party threshold should, at least, be set at more than 50 percent ownership.

In case of Scenario 4, where no capital relationship exists between the interest payer and カジノ シークレット 無料 ボーナスayee, it should be clarified that there is no room for interest limitation rules to be applied.

(3) Should a Small Entity Exception or Threshold Apply? (Chapter VII)

It is desirable to apply a small-entity exception in order not to increase the administrative burden on those entities. At the very least, it is not appropriate to take カジノ シークレット 無料 ボーナスolicy of not recommending the application of a small-entity exception at a national level.

(4) Considerations for Groups in Specific Sectors (Chapter XIII)

1. (a) Financial sector
   It is necessary to recognize that the capital structure of banks and other financial institutions is subject to financial regulations in each country and financial markets' discipline. Therefore, while the existing regulatory requirements for financial institutions act as an effective general interest limitation rule, we do not believe it appropriate to apply the group-widカジノ シークレット 無料 ボーナスule to the group's interest expense other than that on its regulatory capital. Rather, it is desirable to carefully discuss whether or not to introduce the targeted rules to address specific issues or transactions to be dealt with.
   If a group controls financial business companies, Paragraph 213 of Chapter XIII states "special provisions may bカジノ シークレット 無料 ボーナスequired". It is predicted that applying a group-widカジノ シークレット 無料 ボーナスule to a group controlling financial business companies confronts a big problem. If applying a group-widカジノ シークレット 無料 ボーナスule, different rules should be separately applied to financial business entities and non-financial business entities. Instead, it is also suggested that financial business entities are exempt from application of a group-widカジノ シークレット 無料 ボーナスule.

2. (b) Infrastructure projects
   Project finance structures based on non-recourse or limited recourse loans are absolutely essential for engagement in projects which need massive funds. In structuring such project finance, the D/カジノ シークレット 無料 ボーナスatio or the debt-service-coverage-ratio, which deserves a standard, is prescribed by contracts, thus it is not appropriate to limit deductions for interest expense according to a group-widカジノ シークレット 無料 ボーナスule. Based on the fact that the D/カジノ シークレット 無料 ボーナスatio or the debt-service-coverage-ratio deserves a standard for the arm's length principle, infrastructure projects should be exempt comprehensively from a general interest limitation rule.
   In addition, カジノ シークレット 無料 ボーナスroject should not be distinguished as being either public or private.

Sincerely,

Subcommittee on Taxation
KEIDANREN