Australia: Removal of OBU regime and new arbitration process with Belgium

Offshore banking unit regime

On March 12 2021, the Australian government announced the proposed removal of the offshore banking unit (OBU) concessional tax regime/rate from the commencement of the 2023–24 income tax year, i.e. effectively a two year grandfathering for existing OBUs.

On March 17 2021, the government subsequently introduced amending legislation into parliament that would firstly, remove the concessional tax treatment (10% tax rate) for OBUs; secondly, remove the interest withholding tax exemption; and thirdly, close the regime for new entrants by withdrawing the treasurer’s ability to declare an entity to be an OBU.

Eligible offshore banking activities include, among other things, financial intermediation between foreign residents or the provision of financial services to foreign residents in respect of transactions occurring outside of Australia. The OBU regime was originally introduced to assist Australian financial services entities to compete with financial services providers located in low tax jurisdictions in the Asia-Pacific region.

In 2018, the OECD identified the OBU concession to be a ‘harmful preferential tax regime’ and Australia undertook measures to remove or limit the concession, subject to grandfathering provisions.

It is expected that the proposed amending legislation will pass through parliament and into law in the coming weeks.

Australia/Belgium double tax treaty

The Australian Taxation Office (ATO) has released the memorandum of understanding (MoU) on the mode of application of the arbitration processes between the competent authorities of Australia and Belgium under Article 25 of the Australia/Belgium double tax agreement.

The MoU is operative from March 3 2021 and prescribes the arbitration process, selection and appointment of arbitrators, timing issues, confidentiality and non-disclosure rules, operating procedures and the effect of arbitration decisions which are generally binding on both contracting states (subject to limited exceptions).

Generally, unresolved issues arising from a mutual agreement procedure may be submitted to arbitration. However, this usually occurs only after three years from the date on which a case was presented to the competent authority of one contracting state pursuant to Article 25(1) of the double tax agreement.

The MoU is very similar to the MoU entered into between Australia and Switzerland in September 2020.

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