Fears that new Organisation for Economic Cooperation and Development (OECD) tax rules would penalize infrastructure projects have been assuaged.
The OECD wants to bring in new rules, to apply globally, that would aim to tackle corporate tax avoidance. The rules would bind countries to restrictions on the proportion of interest payments that can be deducted against tax, a crucial issue for many infrastructure projects which rely heavily on debt financing.
However, the OECD will allow countries to offer an exemption for so-called “public benefit projects”.
There is still some concern however about how strictly the exemption will be applied. “The conditions to qualify for the public benefit exemptions on the interest rules are strict, but there is scope to make them workable if they are implemented carefully,” said Heather Self, partner at law firm Pinsent Masons, referring to the UK context.
“We would expect to see close working between the Government and contractors to ensure that major PFI projects can qualify for these exemptions,” she added.
Such tax changes would also impact secondaries firms looking to invest in infrastructure funds. Infrastructure secondaries transactions are on the rise this year, with an estimated $614 million of infra fund stakes purchased in the first half of the year, up 28.5 percent from the same period a year earlier, according to data from Setter Capital.
Self pointed out that the infrastructure industry will now be waiting to see how the UK responds to the OECD plans, with a consultation document in the next few weeks expected to shed light on how the recommendations will be adopted.
The OECD is recommending that interest deductibility should be limited to between 10 percent and 30 percent of earnings before interest, tax, depreciation and amortisation (EBITDA). The restriction would apply to all interest including amounts paid to third parties – not just inter-company loans.
The France-based OECD is an international economic organisation with 34 member countries which was founded in 1961 to stimulate economic progress and world trade. Although it normally acts through peer pressure and non-binding ‘soft laws’, it occasionally implements binding treaties.