Senate

Replacement Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P)

Chapter 8 Offshore Banking - Amendments to the current interest withholding tax provisions

As a result of the initiatives contained in the proposed Division 9A concerning the concessional tax rate for income of an OBU, it is necessary, to maintain consistency, to amend the OBU interest withholding tax provisions of Division IIA. [Clause 16]

The definition of 'offshore borrowing' in subsection 128AE(1) will be amended to provide that an OBU can obtain an interest withholding tax exemption were it to:

•

borrow in any currency from an unrelated non-resident;

•

borrow in non-Australian currency from:

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an offshore branch (a permanent establishment) of a resident company; or

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an offshore branch (a permanent establishment) of a related non-resident; or

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a non-resident parent company. [Clause 16]

One or more permanent establishments

Proposed section 128AE(13) introduces a concept of separate entities for branches. It is identical to that in proposed section 121EB introduced for the purposes of proposed sections 121D to 121EA inclusive.

An OBU may consist of:

(a)

one or more permanent establishments in Australia through which qualifying offshore banking activities are carried out; and

(b)

other permanent establishments whether in or out of Australia.

In this case the permanent establishments in Australia referred to in (a) are to be treated as one person. The other permanent establishments are to be treated as separate persons. [Clauses 15 and 16]

The definition of 'permanent establishment' in subsection 6(1) of the ITAA applies equally to residents and non-residents. The term has been used in this context to denote branches of both resident and non-resident companies.

By treating permanent establishments as different persons, domestic banking is separated from offshore banking.

This notion is necessary for the concept of 'offshore person' as it applies to a bank. When conducting OB activities, it enables an OBU to deal with an offshore permanent establishment of the same bank as a separate person. Without this provision, Australian law would require intra-entity transactions to be ignored.

The anti-avoidance provisions in the interest withholding tax regime also make use of the treatment of permanent establishments as separate persons in relation to the imposition of special tax in cases of default.

Extension of the Interest Withholding Tax (IWT) exemption

The law presently provides an exemption from withholding tax for an OBU where the funds are on-lent to a non resident. A series of amendments to section 128AE of the Assessment Act will have the effect of extending the exemption to offshore borrowings used to fund the extended OB activities. This means, for example, that if an OBU borrowed funds from a non-resident and used those funds for trading in accordance with the requirements of proposed subsection 121D(4) it would be entitled to an exemption from IWT in respect of the borrowings. [Clause 16]