Today, the Treasurer announced the implementation of a 'standard' set of tax-related conditions that will apply to foreign investment clearances.
That is, as a condition of being allowed to proceed with a transaction caught by the FIRB regime, foreign multi-national corporations will, among other things, be required to provide confirmation of certain of their tax affairs, pay outstanding tax debts, and provide a range of information to the Foreign Investment Review Board (FIRB) and the Australian Taxation Office (ATO) about the proposed transaction. The Treasurer has announced the proposed conditions so that such transactions are 'not contrary to Australia's national interest', being the threshold which the Treasurer must be satisfied of before granting foreign investment clearance.
This announcement is significant from a foreign direct investment perspective as it likely requires additional or more detailed upfront tax structuring advice prior to submission of a FIRB application, as well as a higher level of engagement with the ATO on FIRB applications. Indeed, in some cases, investors may be required as a condition of clearance to obtain a private ruling issued by the ATO, or to agree on an Advance Pricing Arrangement with the ATO. Non-compliance with such conditions would be an offence under the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) entitling the Treasurer to exercise a broad range of powers to make adverse orders including potentially divestment of the relevant asset.
The proposed changes appear to affect all foreign investors proposing to invest in Australia.
Based on the announcement by the Treasurer, investors should expect that any new applications made for foreign investment clearances will be reviewed for compliance with the proposed tax conditions and, if such clearance is granted, it will be conditional on compliance with the proposed tax conditions. It is not clear from the Treasurer's announcement, whether current applications before the FIRB and the Treasurer which have not yet been cleared will have the conditions imposed.
In response to the proposed changes, investors should:
- seek further or more detailed tax advice at the structuring stage to assess possible tax risks particularly in relation to transfer pricing and tax avoidance provisions;
- be prepared to proactively engage with the ATO at an early stage in connection with transactions requiring FIRB approval, and
- allow for potentially longer foreign investment clearance decision timeframes to work through the tax aspects with FIRB and the ATO.
While review of the tax implications of a proposed foreign investment in Australia already forms part of the Treasurer's 'national interest' considerations, the announcement by the Treasurer and extensive proposed conditions make tax a more involved and critical part of the FIRB application process.