The Australian Government has recently announced that foreign investment approvals will be subject to standard conditions in relation to tax compliance, reporting and other tax matters. The Government's stated purpose is "ensuring companies operating in Australia pay tax on their Australian earnings". While this change does not affect foreign investors' ordinary Australian tax compliance, it is likely to add to the complexity and cost of foreign investment applications and the ongoing compliance burden for successful applicants. It may also expose foreign investors to civil and criminal penalties and even orders for divestment for a failure to comply.
Foreign investors who propose to acquire certain Australian entities, businesses or assets which meet value thresholds are required to obtain approval from the Treasurer, through the Foreign Investment Review Board (FIRB). The Treasurer may reject a proposal if it is contrary to Australia's "national interest". Proposals may also be approved subject to conditions designed to protect the national interest. The impact that a proposal may have on Australian tax revenues has long been a factor that may be considered in assessing the national interest. However, except for certain real estate investments and other proposals that raise specific national interest concerns, most approvals have previously been granted without conditions.
The new requirements
Under the new standard conditions to be imposed on foreign investment approvals, an investor must (and must use its best endeavours to ensure its associates):
- comply with Australian tax laws in relation to the transaction and investment;
- provide any documents or information requested by the Australian Taxation Office (ATO) in relation to the transaction and investment;
- notify the ATO if it enters or has entered into material dealings in connection with the transaction or investment to which Australia's transfer pricing or anti-avoidance rules may apply;
- pay any outstanding tax debt which is due and payable at the time of the transaction; and
- provide an annual report to FIRB on compliance with these conditions.
In cases where a "significant tax risk" is identified, possible additional conditions include that the investor must:
- engage in good faith with the ATO to resolve any tax issues in relation to the transaction and investment, which might include seeking a private tax ruling, negotiating an advance pricing arrangement or changing the structure of the transaction; and
- provide information to the ATO on a periodic basis, such as a forecast of tax payable.
This change does not affect foreign investors' ordinary Australian tax compliance obligations: investors are required in any case to comply with Australian tax laws that apply to them; the ATO already has significant powers to obtain information from Australian taxpayers; and there is no change to the ordinary rules for the assessment of tax or the time for payment. Further, there has been a focus for some time on tax compliance as part of the national interest test and, at least in connection with reorganisation proposals, FIRB has expressly required applications to address tax implications since late last year, and informally for some time prior to that. This increasingly aligns with the ATO's continuing focus on business restructuring within multinational groups.
However, the change has several significant implications for foreign investors:
- in addition to potential penalties under Australia's tax laws, a breach of the new conditions may lead to civil and criminal penalties under the foreign investment laws, including orders to dispose of the relevant assets or interests acquired by the foreign investor;
- although the Treasurer's announcement does not specify the exact range of transactions to which the new conditions will apply, it could include all acquisitions of securities and business assets, extending beyond the previous focus on reorganisations. FIRB is yet to update its "business application checklist" but we expect that FIRB will require detailed information on tax implications to be included in all or most "business applications" and that it will continue to apply particular scrutiny to reorganisations and similar transactions;
- before applying for FIRB approval, foreign investors will need to review their relevant tax arrangements to ensure they will be able to comply with the new conditions, including by:
- considering the appropriate structuring for the acquisition and its tax implications;
- having funds ready to pay any outstanding tax debt on time;
- satisfying the new ongoing reporting requirements; and
- being prepared to engage with the ATO in greater detail and at an earlier time than was previously required, particularly as some investors are also likely to receive requests for additional information on tax matters from FIRB and/or the ATO;
- for many investors, such processes will increase the complexity and costs of making and pursuing an application and may delay the granting of approval, particularly if FIRB chooses to extend its approval period (by up to 90 days) in order to request and consider further tax information. Investors will need to take these potential costs and delays into account in planning their transactions; and
- if a foreign investor acquires a controlling interest in an Australian company, the investor's obligations under the new conditions could extend to the company as one of its "associates". Consequently, the investor may need to use its best endeavours to ensure that the target company complies with the tax laws and provides relevant information requested by the ATO. This could raise issues if the target company itself has entered into tax minimisation arrangements or has other tax issues. Investors often obtain comfort in relation to a target's tax affairs by means of warranties and indemnities given by the seller. However, in light of the new potential consequences of an associate's tax breaches, including divestment orders, investors may now need to conduct more detailed due diligence to satisfy themselves regarding a target's tax affairs and likely ongoing compliance.
Together with the recent strengthening of Australia's foreign investment framework (click here for our previous alert), and the new capital gains tax withholding regime for foreign residents that will come into effect later this year, these new conditions reflect the Government's commitment to ensuring that foreign investors comply with Australia's tax laws.
We encourage foreign investors to seek specialist tax advice at an early stage in connection with any proposal requiring Australian foreign investment approval.