An inevitable reform, a long awaited solution: The establishment of the Australian Foreign Investment Regulatory Authority (AFIRA) – Bovas Johannan

The compliance framework under the Australian foreign investment regime undertaken by both the Foreign Investment Review Board (FIRB) and the Australian Taxation Office (ATO) are currently under the microscope for their lackadaisical approach in achieving the outcomes expected of a compliance framework. 

In 2014, the report on foreign investment in residential real estate by the House of Representatives Standing Committee on Economics provided a rather scathing assessment of the FIRB in the following words: 

“In practice the framework has been undermined due to poor data collection, along with a lack of audit, compliance and enforcement action by FIRB. Australians are entitled to expect that the rules are properly enforced and our committee recommendations strengthen the ability to do this.”

In 2020, not much has changed. The Productivity Commission shares a similar view while considering the spillover impacts of foreign investment:

On the negative side, competition from efficient foreign businesses can result in some Australian firms going out of business, and there are ongoing worries about whether investors generate negative social and environmental spillovers by not adhering to domestic regulations.

Having a robust compliance and enforcement mechanism in the post-COVID-19 era is important not only for delivering a system that arrests the flow of Australian fiscal resources—say in the form of tax evasion by deliberately restructuring companies to avoid Australian taxation liability— and intellectual property rights into foreign hands, but also for sending a message out to the investors that the investments will have solid legal endorsement in Australia and that predatory moves will not be tolerated.

Historic criticisms of the FIRB

The Foreign Acquisitions and Takeovers Act 1975 (Cth) contains both criminal and civil penalty provisions (ss 84-88 and ss 89-97) for offences. An accessorial liability regime (ss 102, 103) is also included with the Treasurer having powers to make adverse orders for non-compliance, including ordering divestment of the relevant asset (s 69).

The Treasurer may also order a foreign person to dispose of interests in assets, land or securities, in cases of serious and/or deliberate non-compliance (s 69). Other penalties can also be applied to third parties who knowingly assist foreign persons in breaching the rules.

Examples of non-compliance include not seeking FIRB clearance when required under the Act, not complying with specific conditions of FIRB clearance if granted, including the standard tax related conditions which are increasingly imposed on transactions or, obtaining clearance, but carrying out the relevant transaction outside of the validity period for the FIRB clearance (generally 12 months) or on materially different terms than those notified to FIRB in the application for FIRB clearance.

The Standing Committee heard that regulators are largely relying on the “honesty of purchasers” to enforce restrictions on foreign housing investment. In other words, the FIRB has been accused of failure at the leadership level, systems failure, inadequate audit and compliance and enforcement capacity. A lack of resources might explain some of the limitations and the backlog in companies such as Alinta completing compliance with the conditions.  Added to this is the indication that FIRB has taken no court action since 2006.

Is the FIRB just another under-staffed organisation that has become nothing more than a paper tiger? The Senate economics committee recently found that FIRB had taken zero enforcement actions against companies in the past three years to ensure compliance. No criminal or civil enforcement action had been taken. It had findings of “partially compliant” and “compliant with caveats”.

The non-statutory entity of FIRB is thus considered as a factor that deters FIRB from discharging compliance and enforcement functions effectively. FIRB’s functions are advisory in nature and it makes recommendations to the Treasurer after sourcing information from various other agencies.

Measures by the Australian Taxation Office have not saved the compliance framework

Compliance and enforcement functions undertaken by the ATO has not been able to yield a positive result either and, in fact, non-compliance and lack of enforcement actions are at its peak when it comes to tax evasion by corporates that use multiple ways to avoid tax. 

There are reports that a number of companies have restructured so that they do not have to meet the reporting requirements of ATO. One way is that whoever owns or controls the company, can split the business by moving turnover to another loss making company that they own.

Statistics tell us that out of 1539 public corporate entities, 38 per cent did not pay any tax in 2013-14, 22 per cent incurred a current year loss, 8 per cent offset tax profit against prior year tax losses, and 7 per cent used franking credits and other offsets (such as foreign tax credits and research and development tax breaks) to reduce their tax.

An imprecise system of taxation and unclear tax regulations have contributed to the corrosion of the Australian tax structure and have done considerable damage to the long term economic stability of Australia. It is an undisputed fact that loopholes in the tax system will send a wrong message out to the world that Australia is a country that provides safe haven for tax evasion.  Robust compliance and enforcement provisions will go a long way in protecting Australia’s taxation system at least until necessary amendments are introduced in the legislative framework.

Necessary reforms in compliance and enforcement

A reform suggested in this regard is the establishment of a regulatory authority through a Commonwealth statute, i.e. the Australian Foreign Investment Regulatory Authority (AFIRA). This authority should be bestowed with the following powers deemed necessary under an appropriate legislative amendment:

  1. Power to undertake compliance and enforcement actions including non-compliance of conditions specified.
  2. Collection, storage, analysis and dissemination of data for decision making and ongoing monitoring of foreign investment businesses.
  3. Power to impose fines and issue divestment orders in the event the investment turns out to be against national interest at any stage of the business.
  4. Matters that constitute or may constitute a contravention of any of the terms of an undertaking under FATA.
  5. Power of disputes to be heard in relation to tax obligations and make decisions including disputes in relation to tax avoidance. The ATO should be mandated to work closely to achieve the desired regulatory outcomes.
  6. Power to investigate suspected breaches of the law under the Australian foreign investment regulatory framework.
  7. Advertise clear and transparent decision-making criteria.

The establishment of such a regulatory body should be one that would strike a balance between Australia’s pro-investor foreign investment model and possible regulatory interventions that may come in the form of prescriptive regulatory compliance and enforcement moves delivered by such an authority. 

Care must be taken that the establishment of such an authority would not result in potential investors avoiding making investments and thus must be crafted in such a manner that convinces investors that the purpose of regulatory authority is to make Australia a more investor friendly destination while protecting the national interest of Australia rather than imposing additional regulatory burden on investors.

The proposed regulatory authority should not be at loggerheads with investors and vendors of Australian assets but rather be a mouthpiece and face of the Australian foreign investment regime. 

To conclude, it is time to have an appropriate regulatory body replacing FIRB as the construct of FIRB has been proved to be ineffective in administering foreign investment compliance regime and to move ATO’s compliance functions, as far as foreign investment is concerned, to the new authority to best satisfy Australian national interest. 

It is key that Australia has a functional and designated compliance and enforcement framework that is modern and adaptable, so that it is able to meet the challenges of the current climate. Australia’s post-COVID-19 foreign investment policy should be one that focusses on reforming the current moribund compliance framework and one that is able to confront the burgeoning invasive posture by hostile states towards the economic and the national security systems of Australia.

The proposition to establish a regulatory authority should not be viewed as a means to solely protect Australia’s national interests, sovereignty and to guard the economic fortress of Australia in times of a global economic crisis due to the pandemic but it should be viewed as an opportunity to honour Australia’s international commitments as well. For example, the Organisation for Economic Co-operation and Development (‘OECD’), of which Australia is a member, has published guidelines for multinational enterprises which suggest that “obeying domestic laws is the first obligation of enterprises”.

The OECD’s policy framework for investment further emphasises the need to have a quality investment environment in the form of a legal framework that reflects a country’s international commitments:

In addition to the level of transparency and protection afforded to investors in the context of the domestic regulatory and legal framework, the quality of a country’s investment environment is also strongly influenced by its international investment related commitments.

The International Centre for Trade and Sustainable Development (ICTSD) shares a similar view

“Compliance with domestic laws and the observation of responsible business conduct during the operations of the investment could become a prerequisite for access to dispute settlement.”

No country in the world has yet established a regulatory authority for their foreign investment framework for fear of being branded as hostile to such investment.  Undoubtedly, the formation of such an authority will mean Australia throwing its hat into the ring of proper regulation of international investment coliseum but the real challenge, of course, involves striking a balance between the rigidity of the proposed authority and the pro-investor policy of Australia.

Bovas Johannan is a Legal Services Officer with Domestic+General and an LLM (Research) Candidate at the Faculty of Law, Bond University.