Australia

Details

  • Service: Tax, Corporate Tax
  • Industry: Financial Services, Banking
  • Type: Regulatory update
  • Date: 2/07/2014

Tax Insights

KPMG's analysis of tax issues and developments.

Julian Humphrey

Julian Humphrey
Head of Tax, Banking Sector

+61 2 9335 7682

jrhumphrey@kpmg.com.au

Life without LIBOR – the ATO’s creative solution 

by Julian Humphrey, Financial Services Specialist

Last week the Australian Taxation Office (ATO) released an 'Administrative Solution' to address the problems created when the British Bankers’ Association decided to cease quotation of AUD LIBOR (London Interbank Offered Rate) with effect from 31 March last year. For more than 12 months foreign bank branches, whose interest deductions on intra branch borrowings are limited to LIBOR, were left without certainty (or more correctly perhaps without a cap) on those deductions or on the amount of interest subject to 5 percent withholding tax.

In what appears to be a first (I can’t find any other ATO document on the ATO website that calls itself an 'Administrative Solution') the ATO has offered foreign banks new benchmarks for AUD borrowings based on the Bank Bill Swap rate (BBSW). Whilst directly relevant to foreign banks, the interesting point is that the ATO has found a way to read references to 'LIBOR' in the 1936 Act as 'BBSW + margin' (ranging from 0 to 80bps depending on tenor).

 

This Administrative Solution is a result of an agreement between the industry, ably represented by Australian Financial Markets Association (AFMA), and the ATO. The Administrative Solution itself points out that it is not a public ruling and does not offer any protection under the tax law. Instead it states, 'taxpayers may rely on this administrative solution in assessing the extent to which their practices present any compliance risk'. In addition, taxpayers will be offered protection from any future change in the Commissioner’s view by PLSA2011/27.

 

There is also a stick: 'Where a taxpayer departs from this administrative solution, the ATO’s views of the taxpayer’s level of compliance risk may increase'.

 

This is an excellent initiative and a tangible example of the new ATO resolving issues at an industry level rather than through compliance. I expect that the ATO will honour its side of the bargain and that there will be general adoption of the proxy rates within the foreign banks who collectively pushed for the administrative certainty offered by this solution. It is just perhaps unfortunate that the solution does not have a more solid foundation?

 

The question it poses for others is what’s next for an administrative solution?

 

Share this

Share this

Corporate Tax

At KPMG we combine an in-depth knowledge of corporate taxation issues with our understanding of how tax fits into the broader picture.

Banking

KPMG’s Banking practice in Australia is well placed to help clients successfully navigate challenging times and capitalise on opportunities.