Who a best practice approach should apply to

43. Base erosion and profit shifting arise in a range of scenarios, including within a group, with related parties outside a group and through the use of structured arrangements with third parties.¹ The best practice approach addresses the risks posed by each of these scenarios, although different rules may be used to address different types of risk. For the purposes of considering which entities these rules should apply to, entities have been categorised into three types: entities which are part of a multinational group; entities which are part of a domestic group; and standalone entities which are not part of a group. It is recommended that, as a minimum, the best practice approach in this report should apply to all entities that are part of a multinational group. Countries may also apply the best practice approach more broadly to include entities in a domestic group and/or standalone entities which are not part of a group.²

Entities which are part of a multinational group

• 44. As set out in the BEPS Action Plan (OECD, 2013), the deductibility of interest can raise base erosion and profit shifting concerns in both inbound and outbound investment scenarios. Therefore, it is recommended that as a minimum a fixed ratio rule as described in Chapter 6 should apply to all entities which are part of a multinational group.
• 45. An entity is part of a group if the entity is directly or indirectly controlled by a company, or the entity is a company which directly or indirectly controls one or more other entities. A group is a multinational group where it operates in more than one jurisdiction, including through a permanent establishment.
• 46. Where a country applies a group ratio rule alongside the fixed ratio rule, it may wish to use a consistent definition between both rules to reduce the risk that an entity subject to the fixed ratio rule is unable to apply the group ratio rule. In this case, the country may instead determine that an entity is part of a group where: (i) the entity is included on a line-by-line basis in the consolidated financial statements of any company; or (ii) the entity would be included on a line-by-line basis in the consolidated financial statements of any company, if that company prepared consolidated financial statements in accordance with any of the accounting standards accepted by the country in applying the group ratio rule (as described in Chapter 7).
• 47. Where a group has more than one entity in a particular country, the country may apply the fixed ratio rule and group ratio rule to the position of each entity separately, or to the overall position of all group entities in the same country (i.e. the local group).³ Applying a rule to the overall position of the local group would avoid the scenario where a highly leveraged entity incurs an interest disallowance even though the interest expense of the local group as a whole falls within the limit permitted.

48. If the benchmark fixed ratio is set at an appropriate level, a fixed ratio rule should to a large extent address base erosion and profit shifting concerns involving payments by entities which are part of a multinational group. To ensure the fixed ratio rule is effective in tackling base erosion and profit shifting, it is recommended that all entities which are subject to the fixed ratio rule are also subject to targeted provisions which address planning to reduce the impact of the rule. However, there may be specific risks which are not dealt with by the fixed ratio rule and it is recommended that countries consider introducing targeted rules to deal with these risks. The role of targeted rules within the best practice is discussed in Chapter 9.