Australia

Details

  • Service: Tax
  • Industry: Financial Services, Banking
  • Type: Regulatory update
  • Date: 13/06/2013

Tax Insights

KPMG's analysis of tax issues and developments.

Alia Lum

Alia Lum
Partner, Tax

+61 2 9335 8332

alum@kpmg.com.au

The slow death of LIBOR 

by Alia Lum, Financial Services Specialist
 
In response to the London Inter Bank Offered Rate (LIBOR) fixing scandal, the British Bankers Association has reduced the number of currencies for which it will publish the London-Interbank-Interest-Offered-Rate (LIBOR). The Australian dollar joins a number of currencies, including the New Zealand and Canadian dollars, Danish Krone and Swedish Krona for which LIBOR was published for the last time at the end of May. Britain's Financial Conduct Authority has suggested the LIBOR will be replaced by a new dual track system as early as next year.

This is important for foreign bank branches operating in Australia that borrow from head office or from another part of the bank – currently deductions on notional interest on those borrowings are capped to LIBOR under Part IIIB of the Income Tax Assessment Act 1936. Withholding tax of 5 percent is payable on the capped interest amount.

 

In the absence of a quoted LIBOR for the currency borrowed, arguably there is now no interest cap. Treasury are considering how best to respond and the ATO has been surveying affected taxpayers.

 

The difficulty is, in the absence of a policy change, to find a replacement benchmark for LIBOR that leaves taxpayers no better or worse off. The Bank Bill Swap (BBSW) reference rate might be an obvious contender, but it lacks an overnight rate and is not quoted for tenors of more than 6 months. For those who have intra-branch borrowings denominated in any of the affected currencies, there is a question over what to do in the interim. Whilst any cap on deductibility is a question for the tax return, the amount of withholding tax payable becomes a current issue.

 

There is little indication that Treasury will use this opportunity to adopt the recommendations of The Board of Taxation report on permanent establishment given to government in May 2012, which included a review of the LIBOR cap.

 

Given the recent LIBOR rate fixing scandals in the United Kingdom, and the likely demise of LIBOR from next year, it is an ideal time for Treasury to put LIBOR out of its misery and remove it from the Australian tax act once and for all.

 

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