The Foreign Investment Review Board (FIRB) has recently issued Guidance Note 47 (GN47), which outlines the circumstances in which the Federal Treasurer will impose tax conditions on a “no objection notification” (Approval). The tax conditions apply to all Commonwealth taxes, including capital gains tax, withholding tax, thin capitalisation and transfer pricing.
The tax conditions, which were discussed in our September update, were issued by FIRB in May 2016 and have been imposed on Approvals since that date. However, prior to the issue of GN47, FIRB applicants had limited guidance on how to interpret the tax conditions, creating uncertainty as to scope and compliance.
GN47 set out the rationale for the tax conditions, and provides clarity on when the tax conditions will be imposed and how the tax conditions should be interpreted. In summary, GN47 states:
- The national interest will be the basis for imposing the tax conditions (i.e. if the potential foreign investment will have an adverse impact on Australia's tax revenues, the tax conditions are likely to be imposed).
- Relevant factors to be taken into account by the Treasurer will include the applicant's previous interactions with Australia's tax system, the size of the action and complexity of the action.
- The imposition of the tax conditions will be on a case-by-case basis.
- Where the proposed action has a significant or particular tax risk, the Treasurer may impose one or more of the "additional tax conditions".
- The Treasurer will not impose the tax conditions where the tax risks can be managed without them (e.g. where the proposed action poses a minimal risk to Australia’s tax system, which would likely capture investors who are exempt from payment of Australian income tax, including foreign government investors)
- Breach of a tax condition may result in criminal prosecution or FIRB seeking a civil penalty order. In extreme cases, the Treasurer may order that the action the subject of the Approval be disposed of.
Importantly, applicants will be given the opportunity to make submissions on the tax conditions. While this is a positive for applicants, it is our view that amendments by FIRB to the tax conditions will only be made on rare occasions, as the tax conditions are drafted to be standard across all Approvals on which they are implemented.
There are some inconsistencies in GN47 which will require further clarity. For example, the additional information on tax conditions 3 and 4 refers to an applicant to provide information that is requested by the ATO, whereas the tax conditions contained in GN47 are drafted on the basis that the requested information is “required to be provided” to the ATO. There may be ambiguity as to what is strictly required.
GN47 also contains FIRB’s interpretation of the phrases “control group” and “best endeavours”, which are the basis of a number of the tax conditions.
- “Control group” – an entity will be within the applicant’s control group where there is practical influence, rather than strictly being determined by what rights can actually be enforced. The application of “control group” will only apply to entities in a control group in relation to the action and any associated transactions, operations or assets in connection with the assets or operations acquired as a result of the action.
- “Best endeavours” – what constitutes “best endeavours” will depend on the applicant’s position within its control group. For example, if the applicant is a subsidiary, then best endeavours may include making representations to the head company regarding the tax conditions, even if the head company decides not to act on those representations.
GN47 will assist in providing certainty on the tax conditions, but should a dispute arise in relation to the tax conditions, there is no guarantee that a court will take the same view of the tax conditions as that expressed by FIRB.