Conditions to be imposed on foreign investment into Australia will include conditions relating to income tax

On 22 February 2016, the Commonwealth Treasurer announced that the Government will apply new requirements on foreign investment applications designed to ensure that “investors in Australia pay the required amount of tax”. In his media statement, the Treasurer said that the standard conditions to be imposed on foreign investment applications prospectively are as follows:

  1. The applicant must comply with Australia’s taxation laws in relation to the action, and any transactions, operations or assets in connection with the assets or operations acquired, directly or indirectly, as a result of the action.
  2. The applicant must use their best endeavours to ensure, and within their powers must ensure, that its ‘associates’ (as defined in section 318 of the ITAA 1936) comply with Australia’s taxation laws in relation to the action and any transactions, operations or assets in connection with the PwC Page 6 assets or operations acquired, directly or indirectly, as a result of the action. 
  3. The applicant must provide any documents or information (this includes documents or information held, possessed or stored outside Australia) requested by the Australian Taxation Office (ATO) in connection with the application or potential application of Australia’s taxation laws in relation to the action and any transactions, operations or assets in connection with assets or operations acquired, directly or indirectly, as a result of the action. These documents or information must be provided within the timeframe specified by the ATO. 
  4. The applicant must use their best endeavours to ensure, and within their powers must ensure, that its ‘associates’ provide any documents or information requested by the ATO in connection with the application or potential application of Australia’s taxation laws in relation to the action and any transactions, operations or assets in connection with assets or operations acquired, directly or indirectly, as a result of the action. These documents or information must be provided within the timeframe specified by the ATO. 
  5. The applicant must notify the ATO if it enters or has entered into any material (as defined by the ATO) transaction(s) or other dealing(s) in connection with the action and any material transactions, operations or assets in connection with assets or operations acquired, directly or indirectly, as a result of the action, to which the transfer pricing rules in Division 815-B of the Income Tax Assessment Act 1997 or the anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936 may potentially apply, where such transactions or dealings have not been previously notified to the Commissioner. 
  6. The applicant must use its best endeavours to ensure, and within its powers must ensure, that its associates must notify the ATO if they enter or have entered into any material (as defined by the ATO) transaction(s) or other dealing(s) in connection with the action and any material transactions, operations or assets in connection with assets or operations acquired, directly or indirectly, as a result of the action, to which the transfer pricing rules in Division 815-B of the Income Tax Assessment Act 1997 or the anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) may potentially apply, where such transactions, dealings, operations or assets have not been previously notified to the Commissioner. 
  7. The applicant must pay any outstanding taxation debt, and must use their best endeavours to ensure, and within their powers must ensure, that its associates pay any outstanding taxation debt, which is due and payable at the time of the proposed action. 
  8. The applicant must provide an annual report to the Foreign Investment Review Board on compliance with these conditions. The first report must cover the first 12 month period commencing on the date of this notice. All subsequent reports must cover a 12 month period beginning on each anniversary of the date of this notice. Each report must be provided within 30 days after the end of the 12 month period to which it relates.

In cases where significant tax risk is identified, the following additional conditions may be imposed:

  1. The applicant must engage in good faith with the ATO to resolve any tax issues in relation to this transaction and its holding of the investment. (Depending on the issues raised by the ATO this might include entering into the negotiation of an advance pricing arrangement or the obtaining of a private ruling with the ATO within a certain timeframe, or compliance with thin capitalisation requirements or changes to the structure of the takeover. The relevant requirements would be included and tailored as appropriate in each case.)
  2. The applicant must provide information as specified by the ATO on a periodic basis including at a minimum a forecast of tax payable. (This could include a requirement to advise the ATO, and provide an explanation, of significant variations from the forecast of tax payable.) 

In his media statement, the Treasurer said that “a breach of these conditions could result in prosecution, fines and potentially divestment of the asset”.

For more information please see our Alert Tax compliance central to Australia’s foreign investment clearance. 

OECD BEPS Transfer Pricing Recommendations 

On 11 February 2016, the Commonwealth Treasury released a discussion paper regarding the adoption in Australia of the transfer pricing recommendations of the Organisation for Economic Co-Operation & Development (OECD) on Base erosion and Profit Shifting (BEPS). PwC Page 7 These new measures may start as early as income years commencing on or after 1 July 2016. 

Australia signs multilateral agreement to share tax information on the activities of multinational companies

On 28 January 2016, the Commonwealth Treasurer announced that Australia was one of 31 countries which had signed the OECD’s Multilateral Competent Authority Agreement (MCAA) for the automatic exchange of Country-by-Country reports. The MCAA will enable implementation of new transfer pricing reporting standards developed under Action 13 of the BEPS Action Plan. 

European Commission response to corporate tax avoidance

On 28 January 2016, the European Commission presented a package of measures for a co-ordinated European Union (EU) wide response to corporate tax avoidance. The anti-tax avoidance package calls on Member States to take a stronger and more coordinated stance against companies that seek to avoid paying their fair share of tax and to implement the international standards against base erosion and profit shifting. 

Key features of the new proposals include: 

  • legally-binding measures to block the most common methods used by companies to avoid paying tax
  • a recommendation to Member States on how to prevent tax treaty abuse
  • a proposal for Member States to share taxrelated information on multinationals operating in the EU
  • actions to promote tax good governance internationally, and
  • a new EU process for listing third countries that refuse to play fair.

According to the media statement these new rules are needed to align the tax laws in all 28 EU countries in order to fight aggressive tax practices by large companies efficiently and effectively.