Interest withholding tax changes to boost access to offshore fundingDOWNLOAD
Tuesday 11 May 2010: Deloitte Banking Tax Partner Emanuel Hiou said that the Government’s announced phased reduction in interest withholding tax rates for Australian banks and foreign banks operating in Australia that are seeking to access funding from offshore markets “will be welcomed by the banking industry in Australia”.
He said: “The industry has lobbied extensively for the broadening of the current interest withholding tax exemption.”
The announced measure is consistent with the recommendations contained in both the Henry Review and Johnson Report.
“The phased reduction in withholding tax rates will not have any short term impact on the funding strategies of banks, but it will make some difference in the longer term,” explained Hiou. “The Government has committed to reducing interest withholding tax rates from 10% to 7.5% from 2013-14 and 5 % from 2014-15. Significantly, the Government has indicated that it is favourably disposed to completely eliminating interest withholding tax in the longer term,” he said.
Hiou pointed out that as noted in the Henry Review, the effective withholding tax rate on offshore funding is quite low at about 3.5% given the existing wholesale funding withholding tax exemption and the relief available under some of Australia’s double tax treaties.
“There are potentially some sources of offshore funding which banks in Australia are unable to attract because they would be subject to withholding tax. The banks would be expected to bear this cost which makes this funding expensive. Therefore, the cost to the Australian revenue would be negligible, estimated at about $70m from 2013-14.
“Over the longer term, this measure will enable Australian based banks to supplement their offshore wholesale funding programs with potentially cheaper funding from offshore retail deposits.
“However, there will be an important restriction attached to this,” he said. “The funding must be used by the banks in their Australian business. This may introduce some compliance complexity as banks will have to develop internal systems to be able to trace the use of the funds in their Australian operations.”
Funding raised by Australian banks from surplus funds of their offshore subsidiaries will also be able to access the reduced withholding tax rates.
Hiou explained that Australian banks have historically had a strong reliance on wholesale funding and a large proportion of this funding is sourced from foreign markets. “Through the GFC, Australian banks continued to access the offshore wholesale funding markets (with the Government’s guarantee in many cases) to refinance maturing debt and increase liquidity. However, this was generally at a higher cost,” he said.
While Australian banks are able to structure their offshore wholesale funding programs to qualify for the existing interest withholding tax exemption, there are currently some potentially cheaper sources of funding which do not qualify for the withholding tax exemption Hiou pointed out.
“This mainly relates to funding from offshore private retail investors in Asian and European countries and the United States,” he said. “Under the existing withholding tax regime, Australian banks seeking to access funding from such investors would be expected to wear the withholding tax, which would make such funding relatively expensive.”
The phased reductions in withholding tax will also apply to foreign banks operating in Australia. Currently, Australian subsidiaries and branches of foreign banks are subject to interest withholding tax on funds from their parent entities or head office.
“Over the longer term, reduced withholding tax rates should increase the competitiveness of banks operating in Australia which will potentially result in cheaper funding opportunities for Australian borrowers,” said Hiou.