Skip to Main Content

Peter Barnes Authors Chapter in United Nations Handbook, Selected Issues in Protecting the Tax Base of Developing Countries

January 22, 2018, Tax Notes

The United Nations has released the second edition of its handbook, Selected Issues in Protecting the Tax Base of Developing CountriesPeter A. Barnes, Of Counsel to Caplin & Drysdale’s International Tax Group, contributed to Chapter IV: “Limiting Interest Deductions” (see pages 179 to 213). While the updated edition contains new chapters on rent and royalty payments and general antiavoidance rules, tax administrators will want to pay particular attention to the handbook’s assertions that developing countries must devise their own creative solutions beyond the OECD’s base erosion and profit-shifting project and tailor their anti-BEPS activities in a manner that conserves administrative resources. Mr. Barnes is also a Senior Fellow at the Duke Center for International Development at Duke University.

Chapter IV: “Limiting Interest Deductions,” by Peter A. Barnes.

In the fourth chapter, Barnes summarizes the issues that developing countries face when addressing the deductibility of interest payments and trying to determine whether a taxpayer has excessive debt. According to Barnes, the issues that developing and developed nations face in this arena are similar, but resource limitations and other issues might make bright-line rules more attractive to developing countries as compared with the complex OECD recommendations in BEPS action 4.

The OECD approach contains four steps, loosely summarized:

1) A taxpayer can deduct all its interest expense, provided it does not exceed a de minimis monetary threshold.

2) A taxpayer can deduct its net interest expense up to a benchmark ratio of net interest to earnings before interest, taxes, depreciation, and amortization. According to the OECD, an acceptable benchmark would be 10 to 30 percent of EBITDA.

3) A taxpayer can apply an additional test that would allow it to deduct a greater amount of interest expense by comparing the ratio in step 2 with a ratio of the global group’s net interest expense to EBITDA. Tax authorities can also choose to apply an uplift (up to 10 percent) to the global ratio.

4) Countries allow taxpayers to carry forward or carry back disallowed interest expense.

According to Barnes, assembling and auditing global group information as required by the third step poses a challenge to administrators and taxpayers. Handling related-party lending also raises tax administration issues — whether the matter requires special rules or whether administrators can handle it through other means. Withholding taxes, which developing countries like to impose on interest payments to nonresident lenders, also present their own set of challenges. Governments need to balance reducing the tax costs of interest deductions against ensuring that the withholding tax does not increase interest rates or stymie investment.

To view the full article, please visit Tax Notes’ website (subscription required).

Excerpt taken from the article “Book Review: UN Handbook Calls for Creative BEPS Solutions in Developing Countries” by Nana Ama Sarfo for Tax Notes.


About Caplin & Drysdale
Celebrating our 55th Anniversary in 2019, Caplin & Drysdale continues to be a leading provider of legal services to corporations, individuals, and nonprofits throughout the United States and around the world. We are also privileged to serve as legal advisors to accounting firms, financial institutions, law firms, and other professional services organizations.

The firm's reputation over the years has earned us the trust and respect of clients, industry peers, and government agencies. Moreover, clients rely on our broad knowledge of the law and our keen insights into their business concerns and personal interests. Our lawyers' strong tactical and problem-solving skills -- combined with substantial experience handling a variety of complex, high stakes, matters in a boutique environment -- make us one the nation's most distinctive law firms.

With offices in New York City and Washington, D.C., Caplin & Drysdale's core practice areas include:
For more information, please visit us at
Washington, DC Office:
One Thomas Circle NW
Suite 1100
Washington, DC 20005
New York, NY Office:
295 Madison Avenue
12th Floor
New York, NY 10017


This communication does not provide legal advice, nor does it create an attorney-client relationship with you or any other reader. If you require legal guidance in any specific situation, you should engage a qualified lawyer for that purpose. Prior results do not guarantee a similar outcome.

Attorney Advertising
It is possible that under the laws, rules, or regulations of certain jurisdictions, this may be construed as an advertisement or solicitation.
©2022 Caplin & Drysdale, Chartered
All Rights Reserved.

Related Professionals

Related Practice Area(s)