The Situation: The Australian Taxation Office ("ATO") has broadened its role in the process for reviewing foreign investment proposals, through closer engagement with foreign investors pursuing acquisitions, mergers and restructures in Australia.
The Result: The ATO's new approach—which is in place now—aims to centralise monitoring of tax compliance issues for implemented transactions. Even though a foreign investment may have been approved by the Australian Foreign Investment Review Board ("FIRB") and therefore been through an initial screening by the ATO, inbound investors should now expect that the ATO will conduct a post-implementation review of the tax issues associated with the investment. The main benefit of this is to allow any tax issues to be identified and dealt with by the ATO and taxpayers as soon as possible after a transaction has been implemented.
Looking Ahead: Foreign acquirers should be prepared to engage with the ATO immediately after a transaction. Doing so should allow the transaction to move through the review process quickly and constructively. Lack of preparation, or taking positions that are inconsistent with those disclosed in FIRB applications before a transaction is implemented, could mean the ATO's review interrupts efforts to integrate the acquisition or merger.
How is the ATO's Role in Australia's Foreign Investment Review Process Changing?
The ATO's Role in Assessing Foreign Investment Applications. In assessing foreign investment proposals, the Australian Government is concerned with a range of "national interest" factors, including the Government's taxation policies and the impact of a foreign investment proposal on tax revenues. Accordingly, the ATO's role in the FIRB process includes advising FIRB in relation to:
- The tax impact of proposed commercial and agricultural foreign investments and restructures;
- The imposition of tax conditions when approving transactions; and
- Ongoing monitoring and compliance activities.
New Post-Implementation Engagement Strategy Aims to Draw Out Tax Issues. Previously, investors could expect to engage with the ATO following lodgement of tax returns in respect of their new investment through regular review and audit processes. However, the ATO now has an objective of adopting a more "preventative and pre-emptive approach" to tax compliance. This means that the ATO now seeks to better understand tax issues from foreign investments in real-time by engaging with inbound investors immediately following implementation of a transaction.
This engagement approach is seen as allowing the parties to identify and seek to resolve issues before returns are lodged. This is a primary objective of the newly established "Foreign Acquisition Engagement and Assurance Team" ("FAEAT").
What Is the Scope of the ATO's Post-Implementation Review? The post-implementation FAEAT review process is expected to focus on the tax profile of the implemented transaction to ensure it is consistent with Australian tax laws and policy.
Drilling down, FAEAT will want to better understand the taxpayer's holding structures, financing structures and commercial drivers.
The ATO's ongoing focus on financing structures is not surprising—with debt-to-equity funding mix and cross-border related-party financing being areas of interest as part of the ATO's typical range of questions when assessing foreign investment applications. While the post-implementation reviews will concentrate on income tax issues, they will also consider goods and service tax risks.
The ATO expects reviews would typically have a 120-day duration, subject to the level of co-operation from the taxpayer and the complexity of the facts. The review would likely commence with a request for information ("RFI"), typically on an informal basis. Of course, the ATO also has extensive statutory powers to require production of information and documents which they may seek to use where considered appropriate.
What if I Already Have an ATO Engagement Team? For Top 100 taxpayers with an ongoing ATO client engagement team, post-implementation reviews are expected to be conducted by that team, rather than FAEAT. In practice, this may mean such taxpayers experience little change from existing processes.
What Are the Potential Outcomes of a Post-Implementation Review?
There are a range of outcomes upon completion of the ATO's post-implementation review.
- No Action: Where no risks are identified or the risks are not significant, the ATO may determine that no further engagement with the taxpayer is required.
- Negotiated Outcome: Where the FAEAT identifies tax compliance issues in a taxpayer's affairs, the parties may negotiate an outcome under which the taxpayer changes its position or structure, having regard to a stated position from the ATO in relation to the risk.
- Formal Audit: If the ATO and the taxpayer are unable to reach a negotiated position in respect of an identified issue, the post-implementation review would transition into a formal audit process to look at the issue in more detail.
Implications for Inbound Investors Going Forward
Foreign investors pursuing Australian in-bound investments should keep in mind:
- Consistency with Pre-Transaction Submissions: The prospect of a tax risk review by the ATO following implementation of a transaction, means that taxpayers should think ahead when preparing their foreign investment application. This includes in addressing the tax-specific questions in FIRB's Application Checklist and in responding to any of FIRB's requests for information (on behalf of the ATO) during the statutory review period. Without clear explanation, deviations or alternative submissions presented to the ATO during a post-implementation review may increase the prospect of a protracted risk review and audit process.
- Transparency when Dealing with Uncertainty: For taxpayers participating in competitive bid transactions or other scenarios where structure and funding details are not fully settled during the FIRB statutory review period, the ATO suggests being upfront, rather than providing positions which may prove to be unsupported. However, this uncertainty should be genuine; the ATO understands that parties may be vague as part of the foreign investment application, notwithstanding that the acquirer's plans may be much further developed.
- Timely Provision of Requested Documentation: To constructively engage with the ATO, taxpayers will need to provide documentation evidencing transactions, including the commercial rationale and decision-making for structures and financing. This may include providing material in response to RFIs which duplicate the requests made during the statutory FIRB review. A failure to provide proper documentation in a timely manner would cause the ATO's review to take longer than necessary, therefore potentially impeding the taxpayer's commercial or other strategic objectives.
- Resourcing and Preparation: Be prepared for lengthier engagement with the ATO. It is clear that the ATO wants to be more on the front foot in relation to foreign investments. This means engaging with FIRB and potentially the ATO throughout the statutory review process, as well as immediately post-implementation and, depending on the outcome of the review, through an audit process.
Four Key Takeaways
- The ATO's role in the Australian foreign investment process has broadened, through the ATO adopting an enhanced approach to engagement for foreign acquisitions, mergers and restructures. Obtaining FIRB approval for a transaction is only the first step.
- The ATO expects to commence post-implementation tax issue reviews shortly after a transaction has been implemented, with a range of potential outcomes, from no further engagement through to commencement of a formal audit.
- Foreign inbound investors should be clear and consistent in all dealings with FIRB and the ATO in relation to their foreign investment application, as those positions may well be tested shortly after implementation.
- The taxpayer's ability to provide, in a timely manner, written material to support commercial drivers, holding and financing structures will be important so as to limit a protracted process with the ATO.