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Interaction of the best practice approach with controlled foreign company rules under Action 3

202. The fixed ratio rule and group ratio rule should be effective in addressing base erosion and profit shifting involving excessive interest deductions and interest used to finance the production of tax exempt income. A country may also introduce controlled foreign company (CFC) rules in accordance with the recommendations under Action 3 (Designing Effective Controlled Foreign Companies Rules (OECD, 2015)), to address situations where an entity makes an interest payment which is deductible under the fixed ratio rule and group ratio rule, but the payment is made to a CFC which is subject to a low rate of tax.
203. Where a country applies CFC rules alongside interest limitation rules, CFC income which is subject to tax on the parent company may be included in the calculation of the parent’s EBITDA when applying the fixed ratio rule and group ratio rule. Where this CFC income includes interest income or expense, the country should consider including the interest in the calculation of the parent’s net interest expense and excluding that interest from the calculation of the parent’s EBITDA.
204. The best practice approach in this report should also reduce the pressure on a country’s CFC rules, by encouraging groups to spread net interest expense between group entities so that there is a greater link to taxable economic activity. This should reduce the level of net interest income arising in CFCs, as groups are likely to reduce the level of intragroup interest payments, and increase the alignment of net interest expense and EBITDA within the group.

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Interaction of the best practice approach with hybrid mismatch rules under Action 2
199. Where a country has introduced a fixed ratio rule, the potential base erosion and profit shifting risk posed by hybrid mismatch arrangements is reduced, as the overall level of net interest deductions an entity may claim is restricted. However, this risk is not eliminated. Within the limits imposed...
(Limiting base erosion involving interest deductions and other financial payments, action 4-2015 final report.)
Interaction of the best practice approach with other rules to limit interest deductions
205. As described in this report, a country may apply the fixed ratio rule and group ratio rule together with targeted rules to tackle specific base erosion and profit shifting risks, including the risks discussed in Chapter 9 as well as other risks identified by the country. A country may also apply...
(Limiting base erosion involving interest deductions and other financial payments, action 4-2015 final report.)
Interaction of the best practice approach with withholding taxes
207. Withholding tax on interest is typically imposed in order to allocate taxing rights over income to a source country, although it is recognised that an effect of withholding taxes may be to reduce the benefits to groups of base erosion and profit shifting involving interest. Where a country applies...
(Limiting base erosion involving interest deductions and other financial payments, action 4-2015 final report.)
Practical Approach to Best Practices Developed and Utilized by Experts in Their Fields
The practical approach, which is a less rigorous form of evidence-based practices, is most frequently used in environmental health programs. Typically, the Best Practices have already been established by various federal, state, and local agencies; professional associations; and industry. Best Practices...
(Best practices for environmental health : environmental pollution, protection, quality and sustainability)
Best Practices in Fly Control
• Conduct a survey of the sources of the flies, types of flies, and concentration of flies to determine appropriate control procedures. • Check all incoming material for signs of fly infestation. • Evaluate all areas near buildings for breeding places and treat them accordingly. • Remove all...
(Best practices for environmental health : environmental pollution, protection, quality and sustainability)
Recommendations for a best practice approach
22. The critical objective of the work on Action 4 is to identify coherent and consistent solutions to address base erosion and profit shifting using interest and payments economically equivalent to interest. In constructing the best practice approach described in this report, a focus has been placed...
(Limiting base erosion involving interest deductions and other financial payments, action 4-2015 final report.)
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...
(Limiting base erosion involving interest deductions and other financial payments, action 4-2015 final report.)
Applying a best practice approach based on the level of interest expense or debt
57. A key cause of base erosion and profit shifting is the ability of a group to artificially separate taxable income from the underlying activities that drive value creation. Therefore, one of the aims of the best practice approach set out in this report is to link the amount of interest deductions...
(Limiting base erosion involving interest deductions and other financial payments, action 4-2015 final report.)
Applying the best practice approach to limit the level of interest expense or debt in an entity
58. A general interest limitation rule may operate directly, by restricting the amount of interest an entity may deduct for tax purposes, or indirectly, by restricting the amount of debt with respect to which an entity may claim deductions for interest. In considering which approach to include in the...
(Limiting base erosion involving interest deductions and other financial payments, action 4-2015 final report.)