Faculty Author Type

Current Faculty [David Duff]

Document Type

Working Paper

Publication Date



international taxation, international tax policy, base erosion and profit shifting, taxation, interest deductibility


Among the ways in which multinational enterprises (MNEs) can shift profits from one jurisdiction to another in order to minimize taxes, one of the most simple and widely-employed involves the payment of interest to related parties and third parties. For these reasons, it is not surprising that the Organisation for Economic Cooperation and Development’s Action Plan on Base Erosion and Profit Shifting (BEPS) identified the deduction of interest and other financial payments as a significant source of BEPS concerns, and that BEPS Action 4 was charged with developing “recommendations regarding best practices in the design of rules to prevent base erosion through the use of interest expense … and other financial payments that are economically equivalent to interest payments.”

This article considers how Canada should respond to the recommendations of BEPS Action 4 in light of recent developments in the U.S. and other jurisdictions. The first section explains the ways in which interest payments may be used to shift profits from one jurisdiction to another in order to minimize taxes, considering both inbound investments and outbound investments, and why this base erosion and profit shifting may be problematic as a matter of tax policy. The second section reviews Canadian responses to these profit shifting strategies prior to BEPS Action 4. The third section summarizes the recommendations of BEPS Action 4 and the extent to which these recommendations have been implemented in other countries. A final section concludes by considering how Canada should respond to BEPS Action 4.



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