Agencies ‘off in their own world’ on foreign investment approvals
The Treasurer's foreign investment streamlining reforms have a steep hill to climb given the size of ATO and Foreign Investment Review Board (FIRB) approval delays.
***UPDATE**** The redomicile referred to in the final line of the article concerned Philip Morris, not British American Tabacco as originally reported.
Despite a statutory timeline of 30 days for FIRB approvals, applicants are often waiting many months if not years to get a determination, raising serious questions about the country’s global competitiveness.
“There’s always a disconnect between how long the consult agencies including the ATO think they should have and how long the clients think they should take to do things,” David Moore, partner at Johnson Winter & Slattery, told a Tax Institute conference on Wednesday.
Earlier this month, Treasurer Jim Chalmers unveiled a suite of reforms designed to streamline and strengthen Australia’s foreign investment framework.
Investments deemed low risk will benefit from faster FIRB approvals, with a target of processing 50 per cent of cases within the statutory timeline of 30 days from 1 January 2025.
Meeting the legislated timeline might seem a modest goal, but according to Moore, the process often goes much longer.
“In reality, FIRB processes can run for years and they’re not linear, so every time the Tax Office has a question … it adds 2 weeks to our process,” Moore said.
“All the while, people are trying to buy an asset, they’re trying to finance it, they’re trying to allocate economic and other risk under a sales agreement, they might have a sunset date, ticking fees, the financier may fall over, all that sort of stuff is happening, and the consult agencies are off in their own world of thinking about things through, in this case, the tax prism.”
That said, Moore said applicants do have some ability to facilitate a more streamlined approvals process if they are upfront.
“The best way to handle the Tax Office is to give them everything they want upfront, settle your structure before you apply if you can … just full disclosure early, some people try to drip feed it, that never works,” he said.
“[The ATO] will come back and ask for everything that that checklist says at some point so you’re better of giving everything to them upfront and if you’re not ready to file because you don’t know then, probably wait.”
The ATO works closely with FIRB in reviewing applications and assessing the impact of a proposed investment on tax revenues and the integrity of the tax system. The ACCC also consults with FIRB on matters relating to competition.
Applications are graded by the ATO’s Tax Consult Team from low to high based on the risk the tax risks they pose. The team also provides qualitative advice on the risk to federal tax revenues and tax integrity.
According to Moore, the Tax Office handles a “massive volume” of M&A transactions each year, roughly amounting to 2,000 but the majority of FIRB applications relate to residential and commercial real estate transactions in addition to those M&A applications.
M&A applications must meet the standards laid out in the Foreign Acquisitions and Takeover Act (FATA).
Bernard Quain, international tax partner at EY, said: “A lot of people don’t appreciate the actual consequences of not complying with requirements” of the FATA, which can include up to 10 years imprisonment and massive financial penalties.
Individuals can be ordered to pay up to $4,695,000 for a breach of a FATA condition, while corporations could be on the hook for as much as $46,950,000.
Moore added that a failure to notify FIRB can also result in criminal or civil proceedings. While new penalties have yet to be tested, the Treasurer has ordered divestment for non-compliance.
The FIRB test is whether an investment is “contrary to the national interest.” It is under this criterion that applicants are expected to share expected tax information.
The ATO might request additional tax information when dealing with large investment transactions or others of particular importance, including infrastructure projects.
“A FIRB approval is only as good as what you told the FIRB on the way in, so if something changes you generally have to trot off and get a variation and wait until that comes through and worst case if they think you’ve misled them, they can void your whole approval,” said Moore.
“That’s what the Commonwealth argued with Philip Morris' redomicile to Hong Kong. That needed FIRB, it was given FIRB, and the Commonwealth said they had been misled as to the reasons and so it was therefore void, meaning it was potentially a criminal offence.”
