Over recent decades, Australia has benefitted immensely from society having become increasingly globalized and interconnected. The nation has evolved into a popular destination for foreign direct investment (FDI) – a minimum ownership stake of 10 percent in a foreign-based enterprise – and is now positioned as the world’s eighth largest recipient of inbound FDI, according to the UNCTAD’s World Investment Report 2018.
But, as China continues clamping down on outbound capital, and various developed countries take to reducing their corporate tax rates and devising tax benefits incentivising inbound FDI, is Australia losing its shine as a foreign investment destination?
The term ‘safe haven’ is commonly used when discussing Australia’s FDI landscape (and foreign portfolio investment (FPI), for that matter) – but why?
With nearly 90 percent of the global population residing in the Northern Hemisphere, Australia’s isolated location represents an array of lifestyle perks. This alone, however, does not warrant its reputation as a ‘safe haven’.
Contributing also – particularly when discussing foreign direct investment – is the resilient nature of Australia’s open, AAA-rated economy; now in its world-leading 27th consecutive year of GDP growth.
“FDI stock has risen every year since 2009, reaching $796 billion in 2016.” – Foreign Investment Review Board (FIRB)"
Foreign Investment Review Board Annual Report 2016-17 (pg.18)
Over roughly the past two years, the Chinese government has opted for stricter capital control measures so as to bolster foreign reserves. For Australia’s foreign investment landscape, the ramifications have been striking.“In 2016-17, China ranked first in terms of foreign investment approvals by country of investor, with a majority of those approvals in residential real estate.” – FIRBBearing the brunt of such measures has been Australian commercial and residential real estate, two popular asset classes among Chinese property investors and developers.The 2016-17 financial year saw 13,198 residential real estate applications granted approval for proposed investment (i.e., not actual investment) worth $25.2 billion; a far cry from the 40,141 approvals worth $72.4 billion in the year prior – per the FIRB.
For all the lures of the Australian market, surely, they must matter for little once prospective foreign investors become instantly dissuaded upon learning of the nation’s high 30 percent corporate tax (CT) rate?Such rhetoric is often deployed by Australians advocating for a CT rate drop; fearful that the failure to do so will hamper long-term economic viability. One such advocate is chief executive of the Business Council of Australia, Jennifer Westacott, who recently argued:“Australia’s 30% top company tax rate has been frozen in time for 17 years and is now out of step with nations such as the UK which is moving to 17%, the US which slashed its rate from 35% to 21%… The OECD average is 24% and in Asia it is 21%.”Indeed, one developed nation to have seen tremendous success with FDI-oriented policy is Ireland. Since degressively cutting their CT rate from 32 percent to 12.5 percent between 1998 and 2003, Ireland has blossomed into an innovative hub; housing sixteen of the twenty largest tech multinationals (e.g., Facebook, Google), and all bar one of the top twenty-five biotech and pharma companies (e.g., Johnson & Johnson, Pfizer).More recently, independent research concluded that France saw inward FDI grow 31 percent in 2017. Partly attributable was the so-called “Macron effect” – a reference to the suite of pro-FDI policy reforms ordered since President Emmanuel Macron took office in May last year, such as an 8 percent reduction to the now-25 percent CT rate.
For all the talk about attracting foreign enterprise with tax-based incentives, little is said about the remaining multitude of factors dictating the world’s flow of invested capital.In Australia’s case, foreign-owned corporations take favourably to their robust economy and infrastructure, low sovereign risk, geographic location (e.g., time zone benefits, maritime routes, proximity to high-growth markets) and world-class universities.Clearly, elements far beyond a country’s company tax framework sway corporate investment decisions, too. Take German-owned Aldi and US-owned Costco, for example. In 2001 and 2009, respectively, they expanded into Australia, having identified that its grocery retail market – dominated by an economically-inefficient duopoly comprising Colesand Woolworths – was ripe for disruption.Another factor contributing to why the CT rate may not be as pressing an issue for Australia is because mining and quarrying (i.e., ~37 percent of Australia’s inbound FDI) investment decisions are more or less predetermined. In this industry, matters relating to corporate tax incentives hold far less influence than, say, for a biotech company, who can firstly vet for favourable foreign investment policy environments.
Just because Australia has maintained their 30 percent CT rate for roughly 17 consecutive years, it should not imply a lack of governmental focus on matters concerning foreign investment policy.No, Australia’s government has been mindful of offering a simple, easy-to-comply regulatory framework for prospective foreign investors, having undergone a significant restructuring process in May 2015. Also, the Foreign Investment Review Board Annual Report 2016-17 detailed how:“In 2017, the Government introduced a package of amendments to enhance the foreign investment framework to facilitate business investment, reduce red tape and simplify the fee framework.”
Foreign Investment Review Board 2016-17 Annual Report is now available at http://firb.gov.au/about/publication/2016-17-annual-report/ … #FIRB #foreigninvestment6:18 AM - May 29, 2018See Australian Treasury's other TweetsTwitter Ads info and privacy
Whilst China further tightening control of outbound FDI contributed to a plummeting volume of residential real estate applications, it
ultimately represents but one small piece of Australia’s foreign investment environment.Similarly, as Australia’s stagnant CT rate becomes a
hot-button political issue, it remains questionable whether any reduction would have a major bearing on the economy’s long-term
viability.Indeed, the fact Australia has managed to evolve into a top-ten inbound-FDI nation in spite of its comparatively high CT rate
suggests its level may not be as alarming as what others proclaim.Lastly, the ongoing inability of Australia – and many others – to
generate substantial tax revenue from large, foreign-owned multinationals may be another reason it remains a popular foreign investment
destination – but that issue warrants another discussion altogether!