The Henry review endorsed the argument of many foreign banks, and banking industry associations, that withholding tax on interest payments tended to distort capital flows.So the review recommends that financial institutions operating in Australia "should generally not be subject to interest withholding tax on interest paid to non residents".The review notes that while the notional rate of interest withholding tax is 10 per cent the effective tax rate is 3.5 per cent given the wide range of exemptions that apply.The government did not pick up this recommendation in its review. In fact, outside superannuation, financial services does not feature in the policy measures announced yesterday at all.