In October 2015, the BEPS Action 4 Report Limiting Base Erosion Involving Interest Deductions and Other Financial Payments set out a common approach to address BEPS involving interest and payments economically equivalent to interest. This included a ‘fixed ratio rule’ which limits an entity’s net interest deductions to a set percentage of its tax-EBITDA and a ‘group ratio rule’ to allow an entity to claim higher net interest deductions, based on a relevant financial ratio of its worldwide group.

The Report also identified a number of factors which suggest that a different approach may be needed to address risks posed by entities in the banking and insurance sectors. These include the fact that banks and insurance companies typically have net interest income rather than net interest expense, the different role that interest plays in banking and insurance compared with other sectors, and the fact that banking and insurance groups are subject to regulatory capital requirements that restrict the ability of groups to place debt in certain entities. The Report therefore allowed countries to exclude entities in banking and insurance groups, and regulated banks and insurance companies in non-financial groups, from the scope of the fixed ratio rule and group ratio rule, and provided that further work would be conducted in 2016 to identify approaches suitable for addressing the BEPS risks posed by these sectors, taking into account their particular characteristics.