The Treasurer has introduced 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 about the OBU tax rate and the “ring-fenced nature of the regime”.

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.

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.

The scheme was controversial long before the OECD got involved. Its operation has been hampered by government and Australian Taxation Office concerns that financial institutions have exploited loopholes in the rules.

In response, there was industry concern that there was too much uncertainty about the application of the rules, which were subject to a number of amendments over the years.

Frydenberg said in March that the government would consult with affected parties to look for new ways to ensure that Australian financial institutions can be competitive in overseas markets.

The same month, the Senate established the Select Committee on Australia as a Technology and Financial Centre. It is due to report in October and may have some recommendations on how the government can revise its support for Australian financial services companies looking to compete in Asia.