The OECD published specific guidance on financial transactions in February 2020
Excessive debt financing has always been on the eye of tax authorities in order to protect their tax base. This is because multinational enterprises (MNEs) have the option to finance their activities with debt or equity each being subject to different tax treatment, and as a result, from a tax perspective, debt financing is considered more advantageous as opposed to equity.
Nevertheless, countries have introduced certain anti-avoidance provisions in order to disallow excessive interest deductions being claimed and therefore making MNEs pay their ‘fair of share of tax’. In doing so, a country may adopt any of the three commonly seen approaches: