The Foreign Investment Review Board has provided much needed clarity on the new tax conditions for foreign investment proposals.
The Foreign Investment Review Board (FIRB) has released a much awaited Guidance Note on the revised tax conditions that were introduced in May this year. The guidance emphasises that the tax conditions will only apply to proposals that present a risk to tax revenues. The Guidance Note is informed by an underlying policy tension: ensuring the integrity and appropriateness of the Australian tax system while simultaneously maintaining and enhancing the attractiveness of Australia as a source of foreign direct investment.
What does the Guidance Note say?
The Guidance Note makes clear that the conditions do not have any impact on the taxation laws. Rather, the objective of the conditions is to ensure compliance with the tax laws, the reporting and production of relevant information to the ATO and the payment of outstanding tax obligations. More precise, tailored conditions may be applied in circumstances where a particular tax risk is identified. These conditions may include engagement, in good faith, with the ATO for an advanced pricing arrangement or a private ruling request.
The Guidance Note provides some specific guidance in relation to the new tax conditions. Importantly, the guidance confirms that a condition mandating the provision of documentation or information at the ATO's request will not require an investor to waive any common law or statutory rights, privileges or the accountant's concession. The Guidance Note also clarifies that a condition requiring the payment of any outstanding tax debt will not require strict compliance in circumstances where that debt is the subject of a payment arrangement with the ATO (eg. an arrangement to repay a tax debt by instalments).
Control groups and best endeavours
A number of conditions require an investor to use its "best endeavours to ensure, and within its powers must ensure, that entities in its control group" comply with the terms. This had created some concern amongst investors because a control group, as defined, includes entities that are not within the de facto control of the investor. A control group, for the purposes of the corporations law, consists of entities that the investor controls, any entities that control the investor (the controller) and any other entities that the controller controls. Given the onus was on the investor to ensure compliance, the interpretative guidance issued by FIRB provides greater clarity regarding FIRB's expectations.
Broadly, the Guidance Note says, amongst other things, that:
- where the investor controls another entity, FIRB expects that it is within its power to ensure compliance with the condition; and
- where the investor does not control the entity within its control group, the investor must use its best endeavours to ensure compliance. "Best endeavours" is explained in the Guidance Note as meaning to do all one reasonably can and this will depend on the relationships between the entities, the conditions that have been applied and the particular circumstances. This may involve making representations to uncontrolled entities within the control group in relation to the relevant condition(s).
How the Guidance Note will be applied in different situations remains to be seen. For example, many corporate groups have divisions (neither of which control one another) which are run independently (and, in some instances, compete with one another). It is hoped that a "one size fits all" approach will not be applied in practice (the fact that the Guidance Note states that what is "reasonable" will depend, in part, on the relationship between the entities provides some comfort in this regard).
What does the Guidance Note mean for you?
Tax has become an increasingly important consideration in FIRB's assessment of the national interest test for foreign investment applications. As such, we expect that these conditions may be frequently applied to a no objection notification.
Serious consequences flow from the breach of a tax condition including prosecution, civil penalties and an order for compulsory asset divestment. The Guidance Note provides that an order to divest will only be pursued for the most serious of breaches. Nevertheless, the consequences are severe and investors should take steps to ensure they comply with the terms. Where you cannot control compliance, all steps that reasonably can be made should be taken to ensure the conditions are satisfied.
As a final consideration, investors are afforded the option of agreeing in advance to any or all of the generalised tax conditions. If the tax conditions do not conflict with your commercial objectives it might be prudent to provide this consent in order to expedite the approval process. Otherwise, it would be advantageous to have, to the extent possible, early engagement with the ATO and FIRB regarding tax matters to reduce the likelihood that tax conditions will be imposed by FIRB.