Guidance on FIRB's tax conditions

WHAT YOU NEED TO KNOW 

• The Foreign Investment Review Board (FIRB) has published Guidance Note 47 which provides guidance on the tax conditions previously released by the Government that may be applied to FIRB approvals (see our previous update). 
• The tax conditions are separated into two categories: Item A Conditions and Item B Conditions (as set out at the end of this update).
• Item A conditions may be imposed where the Treasurer considers that the investment involves a risk to Australian tax revenues.
• Additional Item B conditions may be imposed where the Treasurer considers that there is a significant or particular tax risk to Australian tax revenues.
• Where FIRB is satisfied that tax risks can be managed without the use of tax conditions, the conditions will not be applied.
• The Guidance Note provides a template compliance report.

WHAT YOU NEED TO DO

• Foreign investors should review Guidance Note 47 and obtain legal and tax advice before engaging with FIRB about the application of the tax conditions to any potential investment transactions into Australia.
• Where the tax conditions are imposed, foreign investors should obtain legal and tax advice about the breadth of the conditions and the processes to be implemented to ensure compliance with the conditions.

Guidance on the FIRB tax conditions in summary

FIRB will consult with the ATO in determining the potential tax impact of investment proposals.

Tax conditions may be imposed to address risks associated with, but not limited to, the following: 

• Capital gains tax
• Dividend withholding tax
• Transfer pricing
• Law tax jurisdiction
• Consolidations
• Non-resident withholding tax
• Debt and equity risks
• Thin capitalisation
• Tax avoidance
• Tax liability on future disposals 

The circumstances that FIRB will consider when deciding to impose Item A conditions include: the complexity of the proposed investment, the investment size and previous interactions of the investor with Australia's taxation system.  The additional Item B tax conditions will be considered on a case by case basis and tailored to the particular proposed action.

Foreign investors will be given the opportunity to review and respond to any proposed tax conditions.  According to the Guidance Note, conditions imposed by the Treasurer are not expected to affect the timeframe for considering an investment.

Duration of tax conditions

Imposed tax conditions apply until a termination event occurs as defined in Attachment A in Guidance Note 47.  The termination event which applies depends on the nature of the investment requiring approval.  The termination event includes where the applicant ceases to hold the interest, ceases to control the entity or business or ceases to carry on the Australian business in each case which was the subject of the FIRB approval.

Consequences of breach

If a tax condition is breached, the investor may be subject to prosecution or an application for civil penalty order.  It will depend upon the breach and the surrounding circumstances as to whether legal proceedings are commenced to prosecute a breach and penalties applied by the court.  For serious breaches where it is contrary to national interest to allow the investment to continue, the Treasurer may consider an order requiring a disposal of the interest.

Guidance on Item A conditions

Conditions 1 & 2 - Comply with Australian tax laws

• Compliance with Australian tax laws would be determined by applying usual legal principles and processes, including reliance on objection or appeal rights by affected entities.
• If an investor has taken reasonable care to comply with the relevant tax law and has a reasonably arguable position then it does not breach these conditions (both standards must be met in order not to be a breach).

Conditions 3 & 4 - Provide documents or information requested by the ATO

• Compliance with these conditions does not require the investor to waive any common law or statutory rights or privileges, or the accountant's concession as provided in the ATO's access guidelines.

Condition 5 - Payment of outstanding tax debt

• The ATO's exercise of its discretion to permit the payment of tax debts in a certain manner, such as instalment payments or suspension of debt recovery during an objection or appeal, are not affected by this condition.
• Payment of an outstanding tax debt that is not subject to an ATO payment arrangement may be required prior to the action being taken.

Condition 6 - Annual compliance report to FIRB

• A reporting template is found in Attachment C of Guidance Note 47.  More than one investment may be the subject of the report and the report may be modified to suit particular circumstances. 
• An authorised officer (includes an 'officer' as defined in section 4 of the Foreign Acquisitions and Takeovers Act 1975 (Cth)) must sign the report. 
• Reports to be based on Australian tax years except that if the foreign investor does not file Australian tax returns, it may request for a substituted reporting period from FIRB.

Conditions 7 & 8 - Advising FIRB an action has been taken or a termination event has occurred

• The foreign investor must advise FIRB within 60 days of when an investment the subject of a no objection decision is made, and when a 'termination event' has occurred.

Clarification of 'control group' & 'best endeavours'

Certain Item A conditions (2, 4 and 5) require a foreign investor to use its 'best endeavours' to ensure that entities within its 'control group' comply with certain obligations.   

'Control group' refers to any entities the foreign investor controls, any entity that controls the foreign investor (a controller) and any other entities the controller controls. Control has the meaning given in section 50AA of the Corporations Act 2001 (Cth) which refers to the capacity to determine the outcome of decision about another entity's financial and operating policies.  

If the investor controls another entity then it would generally be expected that it is within the investor's powers to ensure that the other entity acts in accordance with the relevant tax conditions.

Where a foreign investor does not control an entity in their control group, then 'best endeavours' for the purposes of ensuring compliance with the applicable tax conditions will mean doing all that can be reasonably done, and this will depend on the relationships between the entities, the tax conditions and particular circumstances.

ITEM A: CONDITIONS THAT MAY APPLY UNTIL A TERMINATION EVENT¹ OCCURS

1. The applicant must comply with the taxation laws of the Commonwealth of Australia in relation to the action, and any transactions, operations or assets in connection with the assets or operations acquired as a result of the action. An applicant does not breach this condition if it has taken reasonable care to comply with the relevant taxation laws and has a reasonably arguable position.
2. The applicant must use its best endeavours to ensure, and within its powers must ensure, that entities in its control group² comply with the taxation laws of the Commonwealth of Australia in relation to the action and any transactions, operations or assets in connection with the assets or operations acquired as a result of the action. An applicant does not breach this condition if entities in its control group have taken reasonable care to comply with the relevant taxation laws and have a reasonably arguable position.
3. The applicant must provide any documents or information³ that is required to be provided to the Australian Taxation Office (ATO) in accordance with the taxation laws of the Commonwealth of Australia in relation to the action and any transactions, operations or assets in connection with assets or operations acquired as a result of the action. These documents or information must be provided within the timeframe specified by the ATO. 
4. The applicant must use its best endeavours to ensure, and within its powers must ensure, that entities in its control group provide any documents or information requested by the ATO in accordance with the taxation laws of the Commonwealth of Australia in relation to the action and any transactions, operations or assets in connection with assets or operations acquired as a result of the action. These documents or information must be provided within the timeframe specified by the ATO.
5. The applicant must pay its outstanding taxation debt under the taxation laws of the Commonwealth of Australia, and must use its best endeavours to ensure, and within its powers must ensure, that entities in its control group pay any outstanding taxation debt under the taxation laws of the Commonwealth of Australia, which is due and payable at the time of the proposed action. This condition does not apply to payment arrangements agreed with the ATO or where the ATO has exercised its discretion to defer part or all of the payment of a disputed amount, to the extent that those arrangements are complied with. 
6. The applicant must provide an annual report to the Foreign Investment Review Board on compliance with these conditions. The first report must cover the period from the date the action takes place to the end of the applicant’s income year for tax purposes. All subsequent reports must cover the applicant’s income year for tax purposes. If the action takes place less than 90 days before the end of the first income year, then that period can be incorporated in the next report. Each report must be provided by the due date for lodgement of the applicant’s tax return for that year.
7. The applicant must advise the Foreign Investment Review Board within 60 days of taking the action that it has done so.
8. The applicant must advise the Foreign Investment Review Board within 60 days of a termination event that the event has taken place.

¹ For the purposes of these conditions a termination event occurs: (a) when the applicant ceases to hold the interest the acquisition of which was the subject of the no objection notification; (b) when the applicant ceases to control, as defined in the Foreign Acquisitions and Takeovers Act 1975, the entity or business the control of which was the subject of the no objection notification; (c) when the applicant ceases to carry on an Australian business the starting of which was the subject of the no objection notification.

² For the purposes of these conditions, an applicant’s control group consists of entities: (a) that control the applicant (a controller); (b) that a controller controls; (c) that the applicant controls, which includes for the purposes of these conditions an entity that is the subject of the application. For the purposes of determining a control group, control has the meaning in section 50AA of the Corporations Act 2001.

³ This includes documents or information held, possessed or stored outside Australia.

ITEM B: POSSIBLE ADDITIONAL CONDITIONS FOR CASES WHERE A PARTICULAR TAX RISK IS IDENTIFIED

1. The applicant must engage in good faith with the ATO to resolve any tax issues in relation to this transaction and its holding of the investment.¹
2. The applicant must provide information as specified by the ATO on a periodic basis including at a minimum a forecast of tax payable.²

¹ Depending on the issues raised by the ATO this might include entering into the negotiation of an advance pricing arrangement or the obtaining of a private ruling with the ATO within a certain timeframe, the reporting of information as requested on certain transactions, for example, relating to the transfer pricing rules in Division 815-B of the Income Tax Assessment Act 1997, or the anti avoidance rules in Part IVA of the Income Tax Assessment Act 1936. The relevant requirements would be included and tailored as appropriate in each case.

² This could include a requirement to advise the ATO, and provide an explanation, of significant variations from the forecast of tax payable.