In brief
The Australian Government has announced that in applying the national interest test to future foreign investment applications it will be requiring investors to satisfy a series of tax compliance and disclosure obligations relating to the tax implications of the proposed investment, and the requirement will apply to both the foreign investor itself and its associated entities. In some cases, the new obligations will extend to requiring the foreign investor to furnish documents or information held offshore, and for the foreign investor to engage with the Australian Tax Office in obtaining an advance pricing arrangement or tax ruling. Partners Martin Fry and Wendy Rae and Senior Associate Shaun Cartoon report.
How does it affect you?
- The management of tax risk will be a key aspect of planning for foreign investment into Australia. Foreign investors will need to analyse the Australian tax implications of any proposed investment and be prepared to disclose and explain the tax treatment of their investment to the Foreign Investment Review Board (FIRB) and the Australian Tax Office (the ATO).
- Where the foreign investment involves areas of identified tax risk, foreign investors will need to be prepared to undertake good faith discussions with the ATO on the tax attributes of the proposed investment. This may extend to the negotiation of an advance pricing arrangement or obtaining a tax ruling, which can be expected to delay approval of the proposed investment. Timing will be important – there will be instances in which the foreign investor will want to engage with the ATO well before making an application to FIRB.
- Prior to applying for foreign investment approval, investors will need to ensure that they are comfortable with the prospect of having to provide the ATO with information relevant to the proposed investment, including offshore information that may otherwise be beyond the reach of the ATO's information gathering powers under Australian law.
- Foreign investors will need to carefully consider the entities that may fall within their 'associate' group. The Australian Government's announcement places an obligation on foreign investors to use their powers to ensure the Australian tax compliance of their 'associates' and so investors will need to consider their ability and preparedness to do so.
- The ATO is now a key stakeholder in the process by which foreign investment in Australia is approved or disallowed. As such, foreign investors will need to consider whether the potential tax issues arising from their investment make it sensible to engage with the ATO before or at the same time as approaching FIRB.
The announcement has the effect of joining FIRB compliance with tax compliance. The recent Chevron transfer pricing case demonstrates that Australia's tax laws can be shrouded in complexity and uncertainty, yet non-compliance with FIRB conditions can attract both civil and criminal penalties for corporations and their officers. It is therefore a serious matter for one's compliance with FIRB conditions to be tested by reference to compliance with uncertain tax laws
We can reasonably expect further guidance from FIRB on implementation of this announcement. Allens will remain close to FIRB to monitor any further developments
Managing the FIRB process
Assessing and then managing tax risk will need to be a key consideration when planning for foreign investment into Australia. Obtaining clearance from the ATO will not always be necessary or the right strategy. But there will be many instances where the potential for civil and criminal penalties for non-compliance with FIRB conditions make early engagement with the ATO an important step in managing risk.
However, while tax risk management is now a key factor, foreign investors need to assess and manage all aspects of the national interest test. Obtaining a satisfactory FIRB outcome requires planning, skill and judgment across a range of legal disciplines and at Allens we have the experience and depth across all disciplines to manage these issues.
What are the new conditions?
A major overhaul of Australia's foreign investment laws commenced operation on 1 December 2015 – see our publication Client Update: Major overhaul of Australia's foreign investment laws: what's new?
In the period leading up to the commencement of the new regime, we had witnessed a sharp increase in the role and importance of tax issues in FIRB's review and approval of foreign investment in Australia. Among others, this was evident in FIRB's Business Application Checklist, which made it clear that the Australian tax implications of proposed business acquisitions would be taken into account in applying the national interest test to the proposal.
However, yesterday's announcement represents a dramatic step up in the tax compliance and disclosure obligations for foreign investments in Australia.
The Government announced that the standard conditions for an application to not be against the national interest test will now include the following requirements.
(a) Compliance with tax laws: The applicant must comply with Australian tax law in relation to the proposed investment, and any transactions, operations or assets in connection with the assets or operations acquired.
Comment: Given the potential for civil and criminal penalties for non-compliance with FIRB conditions, the uncertainty and complexity of Australia's tax law means that this condition places a heavy burden on foreign investors in determining the potential implications of their investment. As the tax ruling process is a key means by which investors can achieve certainty, in many instances we can expect foreign investors to apply for a ruling from the ATO prior to or in conjunction with their application to FIRB.
(b) Compliance by associates: The applicant must use their best endeavours to ensure, and within their powers must ensure, that its associates comply with Australian tax law in relation to the proposed investment and any transactions, operations or assets in connection with the assets or operations acquired.
Comment: This requirement relies upon the meaning of 'associate' in section 318 of the Tax Act 1936 (Cth). Section 318 gives a notoriously broad and uncertain meaning to 'associate' and at its core captures the entities who may be expected to act in accordance with the directions, instructions or wishes of the applicant and those entities who may be expected to exert such directions etc on the applicant. As such, among other things a foreign investor will need to consider the terms of joint venture arrangements and/or shareholder agreements to assess whether non-controlled entities may nevertheless be considered 'associates' of the foreign investor.
(c) Provide information to the ATO: The applicant must provide any documents or information requested by the ATO in relation to the proposed investment and any transactions, operations or assets in connection with assets or operations acquired. The documents or information must be provided within the timeframe specified by the ATO.
Comment: This requirement extends to providing documents or information to the ATO that may be held by the applicant offshore and may be outside of the ATO's information gathering powers under Australian law. As such, before making an application to FIRB, foreign investors will need to carefully review and consider the documents or information that may be called for production to the ATO.
Given the information sharing arrangements between the ATO and foreign revenue authorities, foreign investors will need to take a cross-jurisdictional view of the tax implications of their proposed investment into Australia.
There may be instances in which the information requested by the ATO may disclose arrangements with or the identity of other parties, and investors will need a strategy to manage this issue.
(d) Provision of information by associates: The applicant must use their best endeavours to ensure, and within their powers must ensure, that its associates provide any documents or information requested by the ATO in connection with the application or potential application of Australia's tax laws in relation to the proposed investment and any transactions, operations or assets in connection with assets or operations acquired. These documents or information must be provided within the timeframe specified by the ATO.
Comment: Again, it will be essential to consider the entities that may fall within the 'associate' net.
(e) Notify transfer pricing and anti avoidance risk: The applicant must notify the ATO if it enters any material transactions or other dealings to which the new transfer pricing rules may potentially apply, or any transactions or other dealings to which the anti-avoidance rules in the tax law may apply.
Comment: This condition is stated to apply to those transactions which may attract the transfer pricing rules or anti avoidance rules and which have not previously been disclosed to the ATO. Also, the condition is to be based on the ATO's determination of what is a 'material' transaction or dealing. Hence, there will again be scenarios in which the foreign investor considers it prudent to engage with the ATO prior to or concurrently with making their application to FIRB.
(f) Notification by associates: The applicant must use its best endeavours to ensure, and within its powers must ensure, that its associates notify the ATO if they enter into material transactions or other dealings to which the new transfer pricing rules may potentially apply, or any transaction or other dealing to which the anti-avoidance rules in the tax law may potentially apply.
Comment: Clearly this condition raises a number of difficult issues in circumstances where entities outside of the applicant's corporate group fall within the 'associate' net.
(g) Pay outstanding tax debts: The applicant must pay any outstanding tax debt due at the time of the proposed investment, and must use its best endeavours to ensure, and within their powers must ensure, that its associates pay any such outstanding taxation debt.
(h) Annual reporting to FIRB: The applicant must provide an annual report to FIRB on compliance with these conditions.
High-risk cases
A second and more onerous level of conditions will apply in circumstances where the ATO has identified significant tax risk associated with the proposed investment.
In these circumstances, the applicant must engage in good faith with the ATO to resolve perceived tax risk issues. The requirements may include:
- negotiation of an advance pricing arrangement (in relation to transfer pricing) within a stipulated timeframe;
- obtaining a tax ruling with a stipulated timeframe;
- compliance with the thin capitalisation rules; or
- changes to the structure of the proposed investment.
These additional conditions highlight the need for foreign investors to carefully analyse the Australian tax treatment of the proposed investment and identify areas which might be perceived by the ATO as presenting an Australian tax risk. Our experience indicates that obtaining advance pricing arrangements and tax rulings on material transactions can be a long and difficult process, and can involve trade offs and outcomes which differ from the originally proposed commercial arrangement. The same can be said of the potential requirement for changes to the structure of the proposed investment.
As such, as a first step foreign investors will need to review the tax treatment of the proposed investment to identify any potential risk issues, and then analyse how such issues are to be addressed with the ATO or by way of structure.