This article was written by Sylvester Urban and Emma Drinkwater.
On 17 March 2021, the Federal Government introduced the Treasury Laws Amendment (2021 Measures No 2) Bill 2021 (the Bill) to abolish the Offshore Banking Unit (OBU) regime.
The proposed legislation aims to ensure Australia is not designated as having a harmful tax regime by the OECD and the European Union after concerns were raised about the OBU regime's concessional tax rate and 'ring-fenced' features.
- removes the preferential tax rate of 10% currently available to participants on eligible activities.
- removes the interest withholding tax exemption for OBUs for interest paid on or after 1 January 2024.
- closes the OBU regime to new entrants.
- allows existing participants of the OBU regime to continue to have access to the preferential tax rate up until the end of the 2022-23 income year.
The OBU regime was introduced in 1987 as a tax incentive to attract and maintain financial sector activities within Australia which are highly mobile and would otherwise be carried on through the low tax environment of Hong Kong or Singapore.
The OBU tax incentive facilitated the use of Australia as a centre for offshore trading, investment management and lending. The users of the OBU regime have included hedge funds and major Australian financial institutions.
The OBU regime provides:
- a concessional tax rate of 10% for Australian registered OBUs for eligible offshore banking activities. This is significantly below the general corporate tax rate of 30%.
- an interest withholding tax exemption on interest payments made by OBUs on eligible offshore borrowings.
The road to abolition
In October 2018 the OECD's Forum on Harmful Tax Practices (FHTP) stated in its report that the OBU regime had potentially harmful preferential features due to its low tax rate and 'ring-fenced' nature that excludes domestic transactions from scope. That is, the regime is seen to unfairly attract foreign investment to Australia that would otherwise have ended up benefiting another country's tax base.
As a result of the concerns raised, the Government announced on 26 October 2018 that it would reform Australia's OBU regime to comply with the OECD principles.
Consequently, Australia's OBU regime has been effectively closed since October 2018. According to the draft Explanatory Memorandum to the Bill, the ATO did not approve any new applications since that time.
Existing participants of the OBU regime will not be immediately impacted. They will continue to have access to the concessional tax rate and interest withholding tax exemption up to the end of the 2022-23 income year. After that time, OBUs will not enjoy any special income tax concessions.
The Government will consult with industry on alternative measures to seek to retain existing OBU activities in Australia and to ensure Australia remains competitive as a centre for financial services.
The unwinding of the OBU regime (and the related corporate structures and transactions) are likely to give rise to some consequential impacts for taxpayers that will need consideration and management ahead of the cessation date.