When the Coalition government was elected in late 2013, it said Australia was “open for business” and that “red tape” would be reduced. In the context of Australia’s foreign investment framework, we have seen a significant wavering in those commitments, none more so than the announcement on 23 February 2016 of new “standard conditions” for approval of foreign investment applications designed “to ensure multinational companies investing in Australia pay tax here on what they earn.1 At a minimum, these measures will increase the red tape and cost of investing in Australia due to the additional tax compliance obligations imposed. However, beyond those challenges, they foreshadow an appetite by the Government to pursue its agendas through the extra-legislative measures available to it under Australia's foreign investment framework.
Australia’s foreign investment framework
Australia’s foreign investment framework requires notification of various foreign investment proposals, including proposals to acquire interests in securities, land and mining tenements and business assets and, in some cases, proposals to start new businesses. The broad reach of the framework often results in it catching investment proposals of many Australian companies as well as proposals for offshore transactions and internal restructures.
Once a notification is made, the Treasurer has the power to block the proposal or approve it with or without conditions based on an assessment of whether the proposal is contrary to the national interest. The Treasurer can impose a condition if he is satisfied that the condition is necessary to ensure that the foreign investment proposal is not contrary to the national interest.
Outside of investments in residential property and vacant land, to date, most foreign investment proposals have been approved on an unconditional basis. Where conditions have been imposed, it has been on a deal-specific basis in order to address specific national interest concerns (e.g. maintaining of a group’s headquarters in Australia).
The changes in a nutshell
Under the new standard conditions, the applicant must agree, and must agree to use its best endeavours to ensure, that it and its associates:
- comply with Australia’s taxation laws;
- provide any documents or information requested by the Australian Taxation Office (ATO);
- notify the ATO about entry into any material transactions or dealings to which Australia’s transfer pricing or anti-avoidance rules apply;
- pay any outstanding taxation debts which are due and payable at the time; and
- provide an annual report to the Foreign Investment Review Board (FIRB) on compliance with these conditions,
in so far as it relates to the foreign investment and associated transactions, operations or assets.
Further, where a significant tax risk is identified, the applicant will be required to:
- engage in good faith with the ATO to resolve any tax issues, such as by negotiating an advance pricing arrangement (APA) or obtaining a tax ruling; and
- provide information specified by the ATO on a periodic basis, including a forecast of tax payable and explanation of any significant variations to the forecast.
This is not the first time we have seen standard foreign investment conditions—the Treasurer already imposes standard conditions in the context of acquisitions of residential properties by temporary residents and acquisitions of some vacant land.
It is also not the first time we have seen tax-related conditions and associated reporting requirements—the Government has had an increased focus on the revenue impacts of foreign investment proposals since at least 2012. Michael D’Ascenzo AO, a former Commissioner for Taxation, joined FIRB in 2013. What is new, is the move to a standard and broad set of tax conditions.
Consequences of a failure to comply
A breach of conditions on which foreign investment approval has been granted is an offence that can give rise to criminal or civil prosecution. Upon conviction, the Treasurer is empowered to issue a disposal order in respect of a relevant asset. A failure to comply with that order triggers a further offence and empowers the Treasurer to seek Court-enforcement of the disposal.
While disposal orders are the “sting in the tail”, and Australia has been taking action in recent times to force disposal of residential properties acquired by foreign investors in breach of Australia’s foreign investment law, disposal orders outside of residential real estate have been very rare. Further, a disposal order can only be made following a conviction for breaching an approval condition, and so a Court will need to be satisfied that there has been a failure to comply with Australia’s taxation laws (if that is the condition that the foreign investor is alleged to have breached). Accordingly, we anticipate that it will be necessary to finalise any tax assessment, objection and appeal processes before such a divestment order could be made—this could take a number of years.
The other potential avenue of resistance is to claim that the imposition of standard tax conditions is beyond the power of the Treasurer. Australian courts have been reluctant to second-guess the Government on national interest issues on the basis that an assessment of national interest is a political question best determined by elected representatives. This is likely to remain the case, but courts are prepared to review decisions of the Treasurer concerning the national interest test where a condition precedent to the exercise of power has not been fulfilled, matters irrelevant to the national interest have been considered or no reasonable person could have made the decision that was made.2
We think the greatest risk for the Government is a challenge to the standard tax conditions brought on an argument that the Treasurer must assess the national interest in the context of a specific foreign investment proposal and identify specific national interest concerns arising from that proposal before he is empowered to impose conditions. In imposing standard tax conditions, in essence, the Treasurer is saying that—absent them—all foreign investment is contrary to Australia's national interest. That's a big call.
Why is the Australian government doing this?
The imposition of the standard tax conditions is consistent with the Government’s desire to be seen to be taking tough action on multinational tax avoidance as result of the ongoing Senate inquiry and the OECD reports on base erosion and profit shifting released late last year.
However, the unresolved question is whether the measures will do more to deter foreign investment than improve tax collection.
Relevantly, the ATO is already involved in considering FIRB applications3 and the ATO already has extensive powers under Australian tax law to obtain information from Australian taxpayers and, through them, from their foreign associates. The ATO can also access information held by foreign tax authorities through information sharing agreements. So, while the measures might result in the ATO getting this information earlier, it will not usuallychange the nature of the information or the likelihood that foreign taxpayers and their advisers may have different views about the application or otherwise of the transfer pricing and anti-avoidance rules, and the need to involve the Courts to resolve such disputes in many cases. And, of course, it will add extra red tape in providing the information to the ATO at a different time and in a different form than currently occurs.
At a more practical level, there will be a dilemma for foreign multinationals in determining what needs to be disclosed and when, and how this might impact on any financial reporting given the requirements in some countries to make provision for uncertain tax positions. And, in the case of “significant tax risks”, there will be an element of uncertainty as to what engaging in good faith to resolve any tax issues means, and the extent to which the ATO is required to reciprocate. For instance, resolving an APAwith the ATO can take between 12 and 24 months. Further, as the information required to be provided will often be extremely sensitive commercially, foreign taxpayers will also be concerned about the potential for the ATO to in turn share that information with foreign tax authorities that do not necessarily have as robust measures to preserve taxpayer confidentiality as apply in Australia.
On top of recent measures to require reporting of all foreign investment in agricultural and residential land, and the new foreign resident CGT withholding regime,4 it seems that while Australia may still be open for business, it is not quite as friendly as it used to be. It is a concern, for as Treasury notes in a recent paper on foreign investment into Australia, “other things being equal, restrictions on capital inflow would reduce the wellbeing of Australians”5
Beyond tax, where might Australian governments head next?
If the current Government finds success in advancing its agenda on tax through Australia's foreign investment framework, it and future Governments will be encouraged to use standard conditions to achieve other political objectives. The benefit of acting through standard conditions is that the Government can act more quickly and with far less restraint than would be the case if it needed to rely on existing legislation or pass new laws to achieve its objectives.
Beyond establishing what it considers to be a nexus with a national interest concern, there is very little restraint on what a Government, acting through its Treasurer, might do. It may find it very convenient to impose conditions—many standard—in all manner of areas including the environment, industrial relations, human rights, product pricing and other consumer issues, and third-party access to infrastructure to name but some examples.
In this context, we think the imposition of standard tax conditions sets a worrying precedent.