As published on regulationasia.com, Tuesday 16 March, 2021.
The government will consult with industry on alternative measures to ensure activity remains in Australia when the OBU regime ends.
Australia’s Treasury has announced plans to reform the country’s OBU (Offshore Banking Unit) regime, to avoid being labelled as a harmful tax regime by the EU (European Union) and OECD (Organization for Economic Cooperation and Development).
The OBU, established in 1992, provides a more attractive tax rate for offshore banking activity conducted by Australian registered banks.
Currently, the regime provides a concessional tax rate of 10 percent and an interest withholding tax exemption for ‘offshore banking’ activities, which generally involve offshore persons such as non-residents, foreign branches or other OBUs.
In October 2018, the OECD’s FHTP (Forum on Harmful Tax Practices) raised concerns about the concessional tax rate and the “ring-fenced nature” (limited access to domestic markets) of the OBU regime during a review.
According to a report prepared by KPMG Australia in September 2019, the Treasury has been in ongoing dialogue with the FHTP and a recommendation is with the Treasurer for approval.
At one point, the Treasury contemplated addressing the FHTP’s concerns by increasing the OBU tax rate, but no rate materially below 30 percent was acceptable.
There have also been reports that the ATO (Australian Taxation Office) had been reluctant to process new offshore banking unit registrations.
Meanwhile, the EU had granted Australia until 31 December 2021 to adapt its legislation to amend or abolish its ‘harmful tax regime’. Once this deadline is up, an assessment will be presented on whether Australia has met its commitments or not. On this basis, EU member states can decide to blacklist a country.
To address concerns around the OBU regime, the Australian government is planning to introduce legislation to amend its regime. In the meantime, the OBU regime has been closed to new participants and its preferential tax rate removed.
Existing participants operating within the OBU regime will continue to access the concessional tax rate for a period of two years – up to the end of the 2022‑23 income year.
The government will in the meantime “consult with industry on alternative measures” to support the industry and ensure activity remains in Australia once the two year grandfathering period ends.
“These changes reaffirm Australia’s commitment to support the OECD to address harmful tax practices and will promote continued cooperation with other jurisdictions on tax matters,” said Treasurer Josh Frydenberg.
“The Government looks forward to consulting with affected parties to ensure that Australia remains globally competitive and an attractive market for financial services.”