CONTINUEThis site uses cookies. By continuing to browse this site you are agreeing to our use of cookies. Find out more.
  1. Front Page
  2. News By Topic
  3. HSBC Asks Australian Government To Abolish Tax Measures

HSBC Asks Australian Government To Abolish Tax Measures

Mary Swire, Tax-News.com, Hong Kong

23 December 2010


HSBC has called on the Australian government to abolish two tax measures which would remove the key impediment to the growth of foreign banks in Australia.

In a late submission to the Senate Standing Committee of Economics Paulo Maia, chief executive of HSBC Australia, says: “HSBC is supportive of any initiatives that will increase genuine competition, choice and value for banking customers in Australia. We feel the move toward a ‘level playing field’ is a logical and valid aspiration.

“Australia is a priority market for HSBC within the Asia Pacific region and in 2010, HSBC embarked upon an expansion plan in this market, to offer Australian customers an appealing banking alternative and strengthening our position as the leading international bank in Australia.

“As HSBC embarks on a strategy to grow in Australia, we are supportive of any initiatives that provide equitable treatment for institutions seeking to expand in new banking areas and give customers the genuine means to switch products and banking providers more easily. We would like to thank the Committee for the opportunity to contribute to this important discussion around competition in the Australian banking sector”.

HSBC’s recommendations include abolishing interest withholding tax, abolishing the LIBOR Cap, and tax concessions on savings.

The Report says: “Under current interest withholding tax arrangements, authorized deposit taking institutions in Australia are required to pay a 10% interest withholding tax on the interest they pay for funds borrowed from their parent or affiliated banks offshore. Similarly, foreign bank branches in Australia are required to pay 5% interest withholding tax on the interest they pay to their parent company.

“Interest withholding tax was introduced in 1967 as a means of collecting tax on Australian sourced income from non-residents.

“Interest withholding tax is a real cost for Australian borrowers as the foreign lender requires compensation for the interest withholding tax because they do not receive full tax credits in their own jurisdiction. It effectively discourages ADIs and foreign bank branches from bringing surplus funds held by their parents in other markets into the Australian economy to fund their loan book. With the global mobility of capital, it has to date been the key impediment to the growth of foreign banks in Australia.

“In May 2010, the Government announced in its Federal Budget that the interest withholding tax applicable to such offshore borrowings will be reduced to 7.5% in 2013-14, to 5% in 2014-15, with an eventual aspiration of 0%. Immediate removal would lead to immediate flow of funding to Australia which would lead to lower rates for customers.

“Both the Johnson Report and the Henry Review recommended the abolition of this tax.

“HSBC recommends making Australian ADIs and foreign bank branches exempt from interest withholding tax as soon as possible to allow them to expand their operations in Australia without being penalized for lending in Australia those savings held by their parent company in other markets”.

Abolishing the LIBOR cap, HSBC believes would also lead to a flow of funding to Australia and lower rates for customers. The Report says: “Part IIIB of the Income Tax Assessment Act 1936 (Tax Act) treats a foreign bank branch as if it were a separate entity from its parent for key transactions, like intra-bank lending. Ordinarily, this would see a foreign bank branch taxed on its income only after allowance is made for expenses incurred in earning that income. Section 160ZZZA(1)(c) of the Tax Act, however, introduces an exception to this rule by limiting the tax deductibility of interest paid by a branch on borrowings from its parent to the London Interbank Offered Rates (LIBOR). When funds are provided at a rate in excess of the applicable LIBOR rate, the excess is not tax deductible. This is known as the ‘LIBOR cap’.

“The LIBOR cap was introduced as a convenient way to administer the tax law relating to intra-bank funding. Initially it was possible for bank branches to absorb the costs involved, however as foreign bank lending has increased in Australia, so has the LIBOR cap constraint. The impact of the LIBOR cap on competition in Australian banking is: 1. It increases the cost of funding for foreign bank branches. 2. This tax cost is further exacerbated by regulators (including APRA) who as part of more stringent liquidity risk management are now requiring banks to have longer term funding. LIBOR does not prescribe any rates for lending terms of greater than 12 months. Hence, the tax deductibility of borrowing costs of longer than 12 months is artificially and unfairly capped at the LIBOR 12 month rate. 3. It subjects foreign bank branches alone to a technically inaccurate transfer pricing rule: LIBOR is not an accurate representation of the cost of funds from a foreign bank parent. 4. Foreign bank branches incur an additional tax compliance cost as they are required to manage and record processes verifying each borrowing against its relevant LIBOR rate. 5. Banks entering or trying to increase their presence in the Australian market are most impacted by the LIBOR cap as they do not have existing funding programs in Australia. As a result, they are more reliant on parent bank funding, to which the LIBOR cap applies.

“Recommendation 3.5 of the Australian Financial Centre Forum Report Australia as a financial centre: Building on our Strengths (the Johnson Report) released in January 2010 recommended that the LIBOR cap be removed. In May 2010 the Government asked Treasury to review the LIBOR cap, stating it will respond to Treasury’s recommendation when the review is completed.

“Both the Johnson Report and the Henry Review recommended the abolition of this tax.

“HSBC recommends the LIBOR cap on deductibility of interest paid on branch parent funding be removed as soon as possible.

HSBC also asks for tax concessions on savings, saying that current tax arrangements favor superannuation and property investment, at the expense of Australian savings: “The shortage of Australian deposits has increased the reliance of Australian banks on wholesale funding, and with it a whole raft of competition challenges relating to funding sources.

“In the 2010 Federal budget, the Government announced the introduction of a 50% tax discount on interest income up to AUD1,000 per year. Applicable on income earned on bank accounts, savings accounts, term deposits, bonds and annuities, the tax change was to take effect on July 1, 2011. Since then, however, the Government has announced the discount would be delayed by 12 months and the discount would be phased in: AUD500 in 2012-13 and AUD1,000 thereafter.

“HSBC recommends more significant tax concessions are introduced sooner, in order to encourage savings and greater diversification of Australian investments”, the Report says.

The Report concludes by saying: “As HSBC seeks to grow in Australia, we are supportive of any initiatives that will create a more ‘level playing field’ for organizations that provide financial services to Australian customers. Improvements will support increased competition, choice and value for banking customers in Australia”.

TAGS: compliance | tax | investment | tax compliance | interest | law | banking | financial services | budget | Australia | tax credits | offshore | transfer pricing | withholding tax | services

To see today's news, click here.

 















Tax-News Reviews

Cyprus Review

A review and forecast of Cyprus's international business, legal and investment climate.

Visit Cyprus Review »

Malta Review

A review and forecast of Malta's international business, legal and investment climate.

Visit Malta Review »

Jersey Review

A review and forecast of Jersey's international business, legal and investment climate.

Visit Jersey Review »

Budget Review

A review of the latest budget news and government financial statements from around the world.

Visit Budget Review »



Stay Updated

Please enter your email address to join the Tax-News.com mailing list. View previous newsletters.

By subscribing to our newsletter service, you agree to our Terms and Conditions and Privacy Policy.


To manage your mailing list preferences, please click here »