On Thursday, 24 November 2016, the Foreign Investment Review Board published Guidance Note 47 in relation to the new tax conditions for foreign investment approvals.
The Guidance Note comments on certain difficult concepts in the standard conditions, and sets out a reporting template for compliance with annual reporting requirements.
FIRB Guidance Note 47
The Foreign Investment Review Board (FIRB) has published its long-awaited guidance on the tax conditions. The tax conditions were originally released in February, and were significantly revised in May 2016 (see our previous alerts here, here and here). The conditions are grouped in two parts.
In broad terms, the conditions in Part A require the investor and certain associates to comply with the tax law, produce information in a timely manner, pay outstanding tax debts and report on compliance with the conditions. The conditions in Part B require the investor to negotiate in good faith with the Australian Taxation Office (ATO) in respect of tax disputes and provide periodic updates of tax payable.
The Guidance Note provides some additional information to assist investors through the FIRB process.
- (When the conditions are imposed) The Guidance Note makes it clear that the ATO is being consulted on every non-resident investment proposal but that the conditions in Part A are to be imposed where there is the possibility of a risk to revenue. In making this assessment factors that are taken into account are complexity of the action, its size and previous interactions of the applicants with the tax system. In cases of significant risk, the conditions in Part B may be imposed, which include entering into advance pricing agreements with the ATO or additional reporting requirements (including forecast tax payable).
In our experience there does not appear to be any specific trend as to which transactions will be subject to the conditions, although they have been imposed on over half the applications we have seen.
- (Submissions) Investors will be afforded the opportunity to make submissions to the FIRB decision maker on the application of the tax conditions to the investment. This is consistent with current practice and now forms part of the official Guidance Note.
- (Best endeavours and within its powers) The Guidance Note elaborates on the meanings of “best endeavours” and “within its powers”, in the context of requiring a member of the control group to comply with specified conditions.
FIRB continues to construe “within its powers” strictly. If an investor controls another, it is expected that the other entity will comply with the tax conditions. “Best endeavours” has been clarified, however, to mean making representations to the other entity and doing “all one reasonably can” to encourage them to comply.
A key issue for many investors will be ensuring processes and procedures are in place so as to allow the relevant applicant to be comfortable that the conditions have been complied with, particularly with respect to other members of the control group. In this regard we are seeing agreements being entered into (particularly in co-investments) which provide certain undertakings and other procedures to provide the requisite level of comfort.
- (Timing) FIRB reiterates that it does not expect the imposition of the tax conditions to impact the timing of a no objection decision. This is generally consistent with our experiences to date. To assist with timely FIRB decisions we generally suggest that the imposition of the tax conditions be indicated at the outset of the application as acceptable if the decision maker decides to impose them. This saves delays at the end of the FIRB process.
- (Consequences of breach) A breach of a condition may trigger prosecution or an application for a civil penalty order (depending on the circumstances). The Guidance Note suggests that divestment will only be pursued for the most serious breaches.
Notwithstanding these comments, it remains to be seen how FIRB will practically approach the issue of penalties upon breach and importantly, whether the ATO will seek to simultaneously levy penalties under Australian tax law in addition to those sought by FIRB.
- (Privileges) It is now confirmed that the tax conditions will not be used to require the investor to waive common law or statutory rights or privileges or the accountant’s concession.
The Guidance Note includes a reporting template that investors may use to comply with the annual reporting obligation in condition 6 of Part A. The template will greatly assist in streamlining compliance with the annual reporting requirement.
If the investor has nothing to report, it may simply state that it has complied with the condition. Details must be provided if there is non-compliance or there is a dispute with the ATO relevant to the condition.
Importantly for investors who are not otherwise required to lodge Australian tax returns, the guidance provides that FIRB must be contacted to arrange a substituted reporting period which is relevant to determining the date of lodgement of the annual report.
Minor changes to tax conditions
Two minor changes have been made to the tax conditions attached to the Guidance Note. Both are welcome and provide greater certainty for investors.
The condition requiring investors to provide documents or information “requested by the ATO” has been replaced by a reference to documents or information “required to be provided” to the ATO.
The additional condition to “obtain” a private ruling has been replaced with a condition that a ruling merely be “requested”.
We expect these revisions will be reflected in due course in the official conditions.