The Treasurer announced this morning that the Government will use the foreign investment system to ensure tax compliance by multinational companies when investing in Australia. Using the FIRB process will add an additional mechanism for the Government to monitor and enforce tax compliance by multinational companies.
It has long been the case that FIRB review includes the impact that a foreign investment proposal has on tax when determining if a proposal is contrary to the national interest. Tax compliance is considered alongside any impact the investment has on national security, competition, the economy and the community, as well as the character of the investor. This is set out in Australia’s Foreign Investment Policy.
Now, there is a new step in the equation with additional tax compliance conditions to be included in FIRB approvals. Transfer pricing and anti-avoidance measures are now a key focus as investors must advise the ATO of transactions to which transfer pricing or anti avoidance measures may apply.
These changes have been brewing for some time as the Government has sought to plug holes in revenue and to be seen to enforce national interest concerns in relation to the payment of tax by multinationals. The desired impact of these conditions is to ensure that foreign investors comply with Australian tax laws.
As we have commented previously, FIRB and Tax have moved very close together – residential land acquisitions, FIRB filing fees and the Agricultural land register are now dealt with by Tax. We have already seen tax related conditions imposed on proposals by multinational companies to acquire interests as well as to establish new businesses in Australia. The Treasurer’s release today confirms this new approach generally.
The likely conditions include those that simply seek compliance with the law, while others will require some additional action by foreign investors. Some example conditions are :
- Comply with Australia’s taxation laws
- Provide documents or information requested by the Australian Taxation Office (ATO)
- Notify the ATO if transfer pricing and anti-avoidance legislation may apply to a transaction
- Engage with the ATO in good faith to resolve any tax issues
- Provide FIRB with an annual report on the investor’s compliance with the tax conditions.
The new conditions do not place significant additional obligations on foreign investors as they largely highlight existing requirements for compliance with Australia’s tax laws. However, foreign investors should be mindful of the additional notification and reporting requirements imposed by the conditions when they obtain their approvals.
Ultimately, in an election year, there will be a benefit for the Government in being seen to be tough on tax avoidance and using the enforcement powers under the new foreign investment legislation. However, care should be taken that the vast majority of investment that is compliant with the tax rules is not unduly delayed as a result of tax reviews in the FIRB process. Should decisions be delayed and FIRB timing become uncertain, there will be a negative impact on investment flows.