AUSTRALIA: Work starts on OBU 2.0.

As published on bankingday.com, Wednesday 8 September, 2021.

Financial services industry representatives have told a Senate committee they are confident there is scope to develop an alternative to the Offshore Banking Unit tax regime without falling foul of the OECD and the G20.

Speaking at a hearing of the Senate Select Committee on Australia as a Technology and Financial Centre yesterday, Australian Financial Markets Association policy director Robert Colquhoun said an OECD/G20 policy paper on global tax issues released last month sets out some parameters that should guide Australian policy development.

Most importantly, the paper indicates that a minimum tax rate of 15 per cent could be applied without risking an initiative being classified by the OECD as a harmful tax practice, as the OBU regime was.

Last week Parliament passed a bill that removes concessional tax treatment for offshore banking units, with all offshore banking activities to be subject to the company tax rate from the 2023/24 income year.

The bill also removes a withholding tax exemption for OBUs for interest paid after 1 January 2024 and revokes the minister’s authority to declare that an entity is an OBU.

Treasurer Josh Frydenberg flagged the changes in March when he reported that the OECD and the European Union had raised concerns.

The OBU regime was introduced in 1987 to help Australian financial services companies compete with rivals in low tax jurisdictions in the Asia Pacific. Initially, the scheme applied a withholding tax exemption to interest paid on offshore borrowings made by OBUs.

It was expanded in 1992, with the introduction of a concessional tax rate of 10 per cent in respect of taxable income derived from eligible activities - where Australian institutions are dealing with non-residents in overseas markets.

The OECD did not like the concessional tax rate of 10 per cent, when compared with the Australian company tax rate of 30 per cent.

Nor did it like the fact that the scheme was “ring-fenced”, which means it was only available for certain types of transactions, excluding domestic transactions.

Frydenberg committed the government to work on an alternative to the OBU and the preliminary work has fallen to the Senate Select Committee, under chair Andrew Bragg.

Colquhoun said the latest OECD/G20 paper, Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy, provides much-needed clarity around what the two bodies consider acceptable and unacceptable practices.

It covers revenue sourcing, measures of profit and loss, elimination of double taxation and care-outs.

Colquhoun said: “We can use this framework for future OBU-style arrangements. An important feature is that all profits should be taxed at a minimum rate of 15 per cent.”

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