Uncertainty persists in final OECD tax plan

The Organization for Economic Co-operation and Development (OECD) has prolonged uncertainty about how its highly-anticipated tax proposals will impact private fund managers.

On Monday, the OECD released its final package of actions to address base erosion and profit shifting (BEPS), which private equity practitioners feel could unfairly prevent GPs from domiciling funds and holding vehicles in certain jurisdictions, like Luxembourg or the Netherlands, which feature extensive networks of double tax treaties.

“As predicted they have 'parked' the thorny issue of how the new rules should apply to private equity funds,” said KWM tax attorney Laura Charkin.

Charkin said the final report “makes a few positive noises” about the economic importance of so-called non-collective investment vehicles, including private equity funds, and the need to ensure that they have access to treaty benefits, but that there is “still some concern” within the OECD that these funds could be used to grant treaty benefits to investors who are not themselves eligible for them.

A consultation with stakeholders is planned which will be completed in the first part of 2016, the report said.

The OECD wants to bring in new rules, to apply globally, that would aim to tackle corporate tax avoidance.

Crucially, the rules would bind countries to restrictions on the proportion of interest payments that can be deducted against tax. The OECD is recommending that interest deductibility should be limited to between 10 percent and 30 percent of earnings before interest, tax, depreciation and amortization (EBITDA). The restriction would apply to all interest including amounts paid to third parties, not just inter-company loans.