New foreign investment conditions: Australian tax compliance

The Australian Government announced today that it will apply new requirements on foreign investment applications to ensure multinational companies investing in Australia pay tax here on what they earn.

The Treasurer, Scott Morrison said "The Government is committed to ensuring companies operating in Australia pay tax on their Australian earnings. Where companies fail to do so I will have powers to take action, including ordering divestment of Australian assets."

They will achieve imposing standard conditions on future approvals. The terms of these are set out below.  Essentially foreign investment applications will have to comply with Australian taxation law, Australian Taxation Office (ATO) directions to provide information in relation to the investment and advise the ATO if investors enter into any transactions with non residents to which transfer pricing or anti avoidance measures of Australian tax law may potentially apply.

Additional conditions may also be applied where a significant tax risk is identified in a particular case. These may include requiring the investor to enter into advance pricing arrangements with or seek rulings from the ATO, or comply with other directions from the ATO that are specific to their circumstances.

A breach of these conditions could result in prosecution, fines and potentially divestment of the asset.

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Standard conditions to be met for an application not to be against the national interest:

1. The applicant must comply with Australia’s taxation laws in relation to the action, and any transactions, operations or assets in connection with the assets or operations acquired, directly or indirectly, as a result of the action.
2. The applicant must use their best endeavours to ensure, and within their powers must ensure, that its associates* comply with Australia’s taxation laws in relation to the action and any transactions, operations or assets in connection with the assets or operations acquired, directly or indirectly, as a result of the action.
3. The applicant must provide any documents or information? requested by the Australian Taxation Office (ATO) in connection with the application or potential application of Australia’s taxation laws in relation to the action and any transactions, operations or assets in connection with assets or operations acquired, directly or indirectly, 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 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 taxation laws in relation to the action and any transactions, operations or assets in connection with assets or operations acquired, directly or indirectly, as a result of the action. These documents or information must be provided within the timeframe specified by the ATO.
5. The applicant must notify the ATO if it enters or has entered into any material (as defined by the ATO) transaction(s) or other dealing(s) in connection with the action and any material transactions, operations or assets in connection with assets or operations acquired, directly or indirectly, as a result of the action, to which 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 may potentially apply, where such transactions or dealings have not been previously notified to the Commissioner.
6. The applicant must use its best endeavours to ensure, and within its powers must ensure, that its associates must notify the ATO if they enter or have entered into any material (as defined by the ATO) transaction(s) or other dealing(s) in connection with the action and any material transactions, operations or assets in connection with assets or operations acquired, directly or indirectly, as a result of the action, to which 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 may potentially apply, where such transactions, dealings, operations or assets have not been previously notified to the Commissioner.
7. The applicant must pay any outstanding taxation debt, and must use their best endeavours to ensure, and within their powers must ensure, that its associates pay any outstanding taxation debt, which is due and payable at the time of the proposed action.
8. The applicant must provide an annual report to the Foreign Investment Review Board on compliance with these conditions. The first report must cover the first 12 month period commencing on the date of this notice. All subsequent reports must cover a 12 month period beginning on each anniversary of the date of this notice. Each report must be provided within 30 days after the end of the 12 month period to which it relates.
   Income Tax Assessment Act 1936
   

Possible additional conditions for cases where a significant 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.*
2. The applicant must provide information as specified by the ATO on a periodic basis including at a minimum a forecast of tax payable.^

* 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, or compliance with thin capitalisation requirements or changes to the structure of the takeover. The relevant requirements would be included and tailored as appropriate in each case.

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

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This article covers legal and technical issues in a general way. Further advice should be obtained for your specific situation before taking action on any issue dealt with in this article.

Janelle is a senior corporate and commercial lawyer. She has advised many foreign investors on the FIRB rules and compliance generally with Australia's foreign investment regime. She can be contacted on +61 419 719 796 or [email protected]