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About the Dataset Interest Limitation Rules (ILR)

The OECD/G20 BEPS project identified the deductibility of interest as an important area of attention. In particular, profit shifting can arise from arrangements using third party debt (e.g., where one entity or jurisdiction bears an excessive proportion of the group’s total net third party interest expense) and intragroup debt (e.g., where a group uses intragroup interest expense to shift taxable income from high tax to low tax jurisdictions).

In response, the 2015 BEPS Action 4 report focused on the use of all types of debt giving rise to excessive interest expense or used to finance the production of exempt or deferred income. In particular, the Action 4 final report established rules that linked an entity’s net interest deductions to its level of economic activity within the jurisdiction, measured using taxable earnings before interest income, tax, depreciation and amortisation. This included three main elements:

  • A fixed ratio rule based on a benchmark net interest/EBITDA ratio
  • A group ratio rule allowing an entity to deduct more interest expense based on the position of its worldwide group
  • Targeted rules to address specific risks not addressed by the general rule.

Further work on two aspects of the approach outlined in the Action 4 report was completed in 2017. The first addressed key elements of the design and operation of the group ratio rule, focusing on the calculation of net third party interest expense, the calculation of group-EBITDA and approaches to address the impact of entities with negative EBITDA. The second identified features of the banking and insurance sectors which can constrain the ability of groups to engage in BEPS involving interest, together with limits on these constraints, and approaches to deal with risks posed by entities in these sectors.

The OECD gathers information on progress related to the implementation of Action 4, namely, whether a jurisdiction has an interest limitation rule in place and, if so, the main design features of the rule. Design features include:

  • the type of rule (e.g., thin capitalisation, earnings stripping)
  • the financial ratio referenced
  • whether the rule is applicable to net or gross interest
  • whether the rule is applicable to related party debt and/or third party debt
  • whether a de minimus threshold is present
  • whether any exclusions apply
  • whether any loss carry-back or carry-forward provisions apply

Contact: CorporateTaxStatistics@OECD.org