Treasury had not raised any concerns about tax erosion or loopholes in the offshore banking unit regime in discussions it has held with the finance industry over the three years prior to its announcement in Tuesday's Budget.The Government is to amend the existing offshore banking unit regime so that dealings between related parties, including the transfer of transactions between an OBU and a related domestic bank, will be ineligible for OBU treatment.The closure of "loopholes" in the OBU regime is part of a group of measures the Government has announced to boost the corporate tax base. Transactions between OBUs, including between unrelated OBUs, will be ineligible for OBU treatment. Dealings between related parties will also be ineligible. The Government plans to tighten the list of eligible OBU activities.The Government expects these OBU measures to add A$320 million to revenues over the forward estimates period.OBUs have been around since 1986, when a licensing system was begun, and concessional income tax rates have applied to them since 1992. Funds management and insurance companies were included in 1999.OBUs are subject to a concessional tax rate, which is an effective 10 per cent income tax on eligible activities, and an exemption from interest withholding tax.The purpose of the OBU regime is to encourage offshore financial transactions between non-residents to be conducted through an Australian institution.OBUs came in for attention in the 2009 report of the Australian Financial Centre Forum (the Johnson Report), which looked at how government could help foster more cross-border financial sector activity.The report said uncertainty in the tax treatment of OBUs was discouraging activity. For example, there has been uncertainty about whether OBUs have a choice in booking offshore transactions to domestic or OBU accounts. It recommended greater clarity on tax.Another of the Johnson Report's recommendations was that government change the way it assesses eligible activities. These include borrowing and lending, trading, investing and hedging. The report pointed out that product innovation made the list of eligible activities uncertain and forced OBUs to "put square pegs into round holes".A third issue concerns the process for assessing new OBU applications, which is complex and slow.The chief executive of the Australian Financial Markets Association, David Lynch, said a consultation group has held meetings with Treasury since 2010, working on the Johnson Report recommendations.He said that none of the report's recommendations have been implemented. He also said there has been no discussion about banks' exploiting tax loopholes.  "There were no loopholes that I was aware of," he said.He said the problem of "asymmetric swaps", which has been referred to in some commentary, dates back to 2008 and was dealt with by the Australian Taxation Office in a 2010 tax determination.Lynch said the OBU regime in its present form was not competitive with what other financial centres in Asia had in place. AFMA's concern is that the changes included in the Budget will make it even less competitive.Lynch said he was encouraged by the announcement in the Budget that the Government would consult with industry