Changes to Australia’s offshore banking unit regime will harm the country’s already-flagging competitiveness as a financial centre in the Asia Pacific, a leading industry body has warned.
The Australian Financial Markets Association is concerned that the planned changes to the OBU regime will hasten Australia’s decline as a financial centre and it believes the government should give priority to addressing the broader issue of how Australia can regain momentum in that market.
AFMA said the OBU regime is a pillar of Australia’s competitiveness as a financial centre and the decision announced by the Treasurer last week to wind the scheme back puts “significant employment, income and taxation revenue at risk”.
AFMA also said the OECD assessment that prompted the government’s move was “flawed”.
The government will close the OBU regime to new entrants following the passage of legislation and will end the concessional tax rates available under the scheme at the end of the 2022/23 financial year.
Treasury Laws Amendment (2021 Measures No.2) Bill 2021 was introduced in the House of Representatives on Wednesday to give effect to these changes.
The OBU regime was introduced in 1987 to assist 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.
The scheme 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.
Over the years, financial institutions using the OBU regime came to include banks, investment managers, leasing companies, trade finance and securities trading businesses.
In 2018, the OECD Forum for Harmful Tax Practices designated Australia’s OBU regime as “a harmful preferential tax regime”.
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 is “ring-fenced”, which means it is only available for certain types of transactions, excluding domestic transactions.
AFMA policy director Robert Colquhoun said: “The OECD’s comparison of the 10 per cent concessional rate with the 30 per cent corporate tax rate is very blunt. The relevant comparison is between the OBU rate and the rates that apply in Singapore and Hong Kong.”
Colquhoun said the ring-fencing issue was difficult to resolve but the rules covering some activities, such as trading global markets, could be changed to deal with the OECD’s concerns.
He said it is important to keep two things in mind when discussing the OBU regime. First, all eligible activity must be undertaken by OBUs based in Australia dealing with non-residents in respect of non-resident assets.
Because OBUs must be based here, the system makes a significant contribution to the Australian economy.
Second, the regime comes with strict integrity and compliance rules. Colquhoun says there is no evidence the regime has been misused.
AFMA has welcomed the government’s commitment to working with the industry on alternative measures.
“We need to look at the tax settings and what other incentives are available to ensure Australia remains