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.