In February 2014, Treasurer Joe Hockey stated that the tax affairs of foreign investors would be taken into account when foreign investment proposals were considered by the Foreign Investment Review Board (FIRB). In February 2016, the Government announced that conditions aimed at ensuring ‘multinational companies investing in Australia pay tax here on what they earn’ would be applied by the FIRB to foreign investment proposals.
Following consultations between Treasury, the Australian Taxation Office (ATO) and industry, in May 2016 the Government revised the tax conditions that will apply to certain foreign investment proposals. The revised conditions addressed concerns raised by stakeholders about the original conditions, but arguably reduced their effectiveness as a tool to combat multinational tax evasion.
Corporate tax avoidance has been a topic of significant interest in recent years, with media coverage highlighting how some multinational companies pay little income tax, despite operating profitable businesses. Internationally, the OECD and G20 developed an Action Plan on Base Erosion and Profit Shifting (BEPS) and the OECD recently commenced public consultations regarding a proposed multilateral agreement that would implement some of the BEPS measures.
In Australia, the Senate Economic References Committee (Committee) conducted an inquiry into tax avoidance by Australian and multinational corporations. Prior to the dissolution of Parliament the Committee had produced two reports.
Response of the Australian Government
In response to growing concerns about tax evasion and aggressive taxation minimisation practices of some corporations, the Government made a number of reforms to Australia’s taxation system to combat multinational tax avoidance including:
The Government also announced plans to introduce a diverted profits tax modelled on the UK’s law.
Role of the FIRB and powers of the Treasurer
Under the Foreign Acquisitions and Takeovers Act 1975 (FATA) and its regulations, transactions over a certain value or proposed by certain entities (for example, foreign government-linked investors) are scrutinised by the FIRB against the ‘national interest’.
The ‘national interest’ is not defined in the FATA. However, the Government’s foreign investment policy sets out guidelines on national interest matters. One of the matters considered is the proposed foreign investment’s impact on Australian tax revenues. A proposal that does not meet the policy’s requirements may be contrary to the national interest and subsequently prohibited.
Imposition of conditions
Under the FATA, where a proposal poses risk to Australia’s national interest, the Treasurer can either not allow the foreign investment, or impose conditions on it, to safeguard the national interest. The revised tax conditions represent ‘standard’ conditions that will be imposed on foreign investments otherwise compatible with Australia’s national interest but which ‘pose a risk to Australia’s revenue’.
Key differences between the original and revised set of tax conditions
The original conditions required a foreign investor to ensure that its ‘associates’ complied with Australia’s taxation laws. Under the revised conditions, a foreign investor is only required to ensure entities in its ‘control group’ comply with Australia’s taxation laws, narrowing the application of the condition to entities over which the investor has practical control (‘control group’ is a narrower concept than ‘associate’). In addition, the revised condition is not breached by a foreign investor if ‘entities in its control group have taken reasonable care to comply with the relevant taxation laws and have a reasonably arguable position’.
The original conditions effectively provided a new power to the ATO to require a foreign investor to ‘provide any documents or information’ connected to the proposed investment and related transactions, operations or assets. The revised condition is narrower: it only provides that documents or information must be provided in accordance with Australia’s tax laws (but makes a failure to do so subject to the FATA penalty regime).
Perhaps the most significant change is the removal of the requirement for a foreign investor to notify the ATO of ‘material transactions’ connected to the proposed investment and related transactions, operations or assets to which the transfer pricing and anti-avoidance rules ‘may potentially apply’. The requirement on a foreign investor to ensure its associates made similar notifications has also been removed. No rationale for this change has been advanced.
How the revised tax conditions can be used to combat tax evasion
The revised conditions can be used as an additional mechanism to enforce Australia’s tax laws, work as an additional deterrent against contraventions by foreign investors and hence dissuade tax-driven investments. This is because under the FATA, a breach of a condition is punishable by up to three years imprisonment or a fine of up to $135,000 for individuals ($675,000 for corporations). As a result, breaches of conditions imposed by the Treasurer (which might occur, for example, where a foreign investor breaches Australia’s tax laws) may now ‘result in prosecution, fines and potentially divestment of the asset’ under the FATA, and may also attract penalties under tax laws.
Summary: will they work?
Removing the requirement to notify the ATO of material transactions connected to the proposed investment to which the transfer pricing and anti-avoidance rules may have ‘potentially applied’ arguably undermines the efficacy of the tax conditions. Nonetheless, when viewed as a whole and in the context of the reforms made during the last Parliament, the measures represent a strengthening of the tools available to combat tax avoidance by foreign investors.