The government will close its Offshore Banking Unit regime to new entrants and will end the concessional tax rates available under the scheme at the end of the 2022/23 financial year.

Announcing the changes on Friday, Treasurer Josh Frydenberg said the OECD and the European Union had raised concerns about the OBU tax rate and the “ring-fenced nature of the regime”.

“These changes reaffirm Australia’s commitment to support the OECD to address harmful tax practices and will promote continued co-operation with other jurisdictions on tax matters,” Frydenberg said in a statement.

The OBU regime was put in place in 1986 to encourage the expansion of Australian financial institutions into overseas markets. It provides concessional tax treatment, where Australian institutions are dealing with non-residents in overseas markets.

Australian company tax rates have long been seen as a disadvantage for Australian investments managers trying to attract investors in Asian markets where tax rates are low.

The scheme was controversial long before the OECD got involved. Its operation has been hampered by government and Australian Taxation Office concerns that financial institutions have exploited loopholes in the rules.

On the other hand, there has been industry concern that there is too much uncertainty about the application of the rules, which have been subject to a number of amendments over the years.

Frydenberg said the government would consult with affected parties to look for new ways to ensure that Australian financial institutions can be competitive in overseas markets.