Recent years have seen a renewed focus by international revenue authorities on ensuring that appropriate tax is paid by multi-national enterprises operating in their jurisdictions. The revenue authorities have been fortunate in some respects, with governments in many jurisdictions facing depleted coffers and open to any suggestions as to how to boost tax revenues. Given this environment, revenue authorities have found governments more willing to amend laws and change arrangements that have, in many cases, been in place for long periods of time on the basis that such changes will provide a quick fix for cash-strapped countries.
While it is clear in many cases that, existing tax and regulatory frameworks need to be modified to more appropriately deal with globalization and the allocation of tax revenues among the various jurisdictions multinationals operate in, such an environment is not necessarily conducive to good law or administration. In many cases, the long term ramifications of changes in law and policy at the behest of the revenue authorities are not fully considered before being announced or enacted.
1. Recent Australian experience
Recently, an example of this has occurred in Australia. Australia, like many countries, has a process that requires many foreign investors to obtain Australian Government approval (through Australia’s Foreign Investment Review Board (FIRB)) for certain investments into Australia. The circumstances in which this approval is required varies depending on the nature of the investor and the asset class.
While Australia has had these laws in place for over 40 years, significant changes have been made over the last 12 months which have broader ramifications for investors.
In particular, apart from a rewrite of the rules, the introduction of significant fees and the tightening of conditions in certain spaces such as property and agriculture, the Australian Taxation Office (ATO) has begun to play a much more active role in the FIRB approvals process. The ATO has taken on the review of residential property proposals, the agricultural land register and importantly, FIRB’s enforcement role. A former ATO Commissioner, Mr. Michael D’Ascenzo AO is a member of FIRB.
The level of the ATO’s involvement in FIRB approvals also corresponds with an increased focus by it on traditional structuring arrangements used by foreign investors, given its concern that such structures are often being misused to facilitate lower levels of tax liabilities in Australia. This is despite significant reforms being introduced in Australia over the past decade (including regimes which specifically provide for tax to be imposed on certain categories of foreign investors at a lower level) with the aim of attracting investment in Australia.
While the ATO sees itself as “seeking to level the playing field” between Australian and non-Australian investors, there is a real risk that such actions will operate to reduce the level of foreign investment in Australia as well as have unintended consequences for Australian investors themselves, including those that often partner with foreign residents.
The Australian Government has taken a populist stance on ensuring that multi-national investors pay their fair share of tax. The Opposition is also making similar promises in its current election campaign.
This political approach, combined with the ATO’s focus on structuring, are understood to be two of the main drivers that led to the introduction in February 2016 by the Australian Treasurer of a series of “Tax Conditions” that were originally announced as to be imposed on all FIRBapprovals.
While FIRB has historically involved the ATO in its consultation process, the Tax Conditions and greater connection between FIRB and the ATO have resulted in a significant increase in the ATO’s level of influence. In particular, the Tax Conditions gave rise to a real time obligation on investors to disclose information regarding their structuring and investment into Australia, including, in some cases, the anticipated level of tax to be paid by them. The Tax Conditions also required undertakings be given as to payment of tax, notification of certain transactions and arrangements susceptive to Australia’s transfer pricing and anti-avoidance laws as well as imposing obligations to ensure any associates of the investor complied with particular requirements.
While a number of the Tax Conditions in substance replicated existing obligations under Australia’s tax laws, they still raised significant concerns because of the consequences of a breach. In particular, a breach of a Tax Condition could lead to negative outcomes under the foreign investment legislation including a divestment order whereas a breach of the tax law of itself may have resulted in merely a fine or penalty.
Also, it was clear that the obligations imposed in many cases went beyond what Australian taxpayers were subject to. In particular, applicants were required to undertake to ensure or use reasonable efforts to ensure their associates complied with Australian tax laws, information requirements and other matters.
The Tax Conditions were released without any consultation, having been imposed on a number of applicants even before they were officially announced. As would be expected, significant concerns were raised following the official announcement of the Tax Conditions and the circumstances in which they would be imposed. Thankfully, and to its credit, FIRB recognized this and undertook comprehensive consultation process where it sat down with industry participants to better understand the concerns and whether there were ways of addressing these.
Genuine progress was made in this process resulting in the release of revised conditions on 3 May 2016 which both watered down the scope of the tax conditions and clarified the operation of those conditions that remained. While the conditions are in some respects still broad and will need to be carefully considered by investors, they are, for the most part more targeted. Furthermore, it has also been clarified that they will not apply to all FIRB approvals but rather will be more focused on circumstances with enhanced tax risk (although such a call is still expected to be made on a recommendations basis by the ATO). A Guidance Note is expected to be issued by FIRB in the coming weeks to assist understanding of the application of the Tax Conditions.
Overall, the experience shows the risk of making significant policy changes without comprehensive consultation and due consideration. In particular, there can be risks with allowing tax administrators and other government administrators to develop such changes without appropriate checks and balances.
2. Reform in China
China introduced its own reforms to foreign investment with the release of the revised Catalogue for the Guidance of Foreign Investment Industries in early 2015. In general, the Chinese Government has been taking a pro-investment stance towards foreign investors by reducing barriers and relaxing limitations on foreign investments.
From a tax perspective, the PRC Enterprise Income Tax Law (which became effective on 1 January 2008) has tried to create a level playing field for both domestic and foreign investors by phasing out those income tax incentives and privileges that were reserved for foreign investments only under the old tax regime.
In recent years, the PRC tax authority has taken steps to combat tax avoidance and safeguard its fair share of tax revenue on a global scale by introducing a series of rules and regulations in the following respects:
- general Anti-avoidance Rules;
- special tax adjustments for related party transactions (transfer pricing);
- beneficial ownership requirement for claiming tax treaty benefits;
- indirect transfer of China taxable properties; and
- outbound payment of service fees and royalties to foreign affiliates.
Having said that, it should be noted that these tax rules and regulations may not be necessarily targeted at foreign investments, however their repercussions for foreign investments should not be underestimated.
In addition, China has been proactively participating in theOECD/G20 BEPS Project, having equal rights and liabilities with OECD member countries. With the release of the2015 final reports, the State Administration of Taxation (SAT) has set forth an internal agenda for localizing theBEPS deliverables. With this new development, we expect to see more and grander changes in the landscape of PRCtax regime in the foreseeable future.