handbook-tb

Protecting the tax base of developing countriesis unlikely to completely offset the corporate tax forgone as a resultof the interest deduction because corporate tax is usually imposedat a higher rate than the rate of gross withholding tax. The rate ofwithholding tax might vary depending on the nature of the loan andthe status of the recipient (for example, the parent company, a groupfinance company or an unrelated bank). Determining the appropriaterate of tax and the economic incidence of the tax are challenges indesigning a withholding tax system.3.3 Developing country perspectiveThe variety of responses discussed above to base-eroding interest paymentsraise a number of questions for developing countries. In establishingrules to prevent inappropriate interest deductions, developingcountries must balance the need to attract investment against thenecessity of protecting the tax base. In addition, considerations of practicalimplementation should be taken into account. For example, anapproach based on worldwide apportionment would require substantialinformation from other jurisdictions to be available. In contrast, afocus on only related-party loans in the context of thin capitalizationrules would present fewer administrative challenges, although it couldbe subject to taxpayer manipulation that would undercut its effectiveness.Rules that broadly deny the interest deduction, while easilyadministered and appealing to developing countries, run the risk ofdiscouraging commercially appropriate financial structures. Similarly,use of withholding taxes on outbound interest payments, especially tounrelated lenders, may raise borrowing costs for local borrowers.3.4 OECD Deliverables on limiting the deductionfor interestThe OECD Action Plan on BEPS foresees its Deliverables withrespect to limiting the deduction for interest being published bySeptember 2015. 1111OECD, Action Plan on Base Erosion and Profit Shifting, supra note2, Annex A.15