Submission – Reform of the Overseas Investment Act 2005: Facilitating productive investment that supports New Zealanders’ wellbeing

The New Zealand International Business Forum (“NZIBF“) welcomes the opportunity to make a submission on Phase Two of the reform of the Overseas Investment Act 2005 (“Act“) and the matters raised in the Treasury’s consultation document “Reform of the Overseas Investment Act 2005: Facilitating productive investment that supports New Zealanders’ wellbeing” dated April 2019 (“Consultation Document“).

NZIBF would be happy to engage further with the Treasury on the matters raised in this submission, the Consultation Document and the Phase Two review more generally.

Overview and summary

NZIBF agrees with the Treasury’s assessment of the importance of foreign investment in New Zealand. Foreign direct investment is a key element in achieving New Zealand’s sustained prosperity, supplementing our relatively shallow capital base, fostering the development of productive businesses and infrastructure, facilitating the innovation that drives domestic competition and productivity growth, and generating new employment opportunities.

NZIBF is accordingly a longstanding and strong supporter of foreign investment in New Zealand and of provisions in our trade agreements that provide appropriate protection for foreign investment (both inward and outward), while also recognising the Government’s continuing right to regulate in the public interest. NZIBF would be concerned if proposed changes to the foreign investment regime were to be interpreted as signaling that foreign investment was unwelcome in New Zealand.

NZIBF supports the objective of the reform, being to enable the Government to effectively manage overseas investment while ensuring that the Act operates efficiently and effectively, and support overseas investment in productive assets.

NZIBF is pleased to note that the Consultation Document presents options to address many concerns it has previously raised with the Treasury. We have summarised these concerns and our preferred options below.

Control thresholds

NZIBF considers that the control thresholds in the Act should be increased to align with the reality of control enjoyed by foreign investors over sensitive New Zealand assets. NZIBF:

(a)  in relation to the definition of “overseas person”, supports:

(i)  Option 1 being a 49% ownership threshold, but considers that this should be extended to non-listed entities as there is no compelling policy reason to treat those entities differently; and

(ii)  in the case of listed entities, that non-associated interests of less than 5% should be excluded from counting towards the threshold, as set out in Option 2;

(b)  in relation to the tipping point for requiring consent, prefers Option 2, with an amendment to provide that consent is only required where the investor acquires a 25% or more ownership or control stake; and

(c)  in relation to incremental investments, strongly supports Option 1, being to allow an overseas person to increase its control interest by any amount below the relevant key control threshold. We submit that any such amendment should enable the fluctuation of ownership within the boundaries of the control thresholds.

Complexity, uncertainty and compliance costs

NZIBF agrees that the regime requires revision to reduce unnecessary complexity, uncertainty and compliance costs. NZIBF:

(a)  strongly supports the revision of the investor test to address problems with its current form and application. We prefer Option 3, as it provides the greatest certainty to investors while enabling the regulator to consider key matters relevant to the character of the investor;

(b)  supports the removal of the requirement for New Zealanders to satisfy the investor test;

(c)  disagrees that the investor test should be expanded to apply to non-natural persons;

(d)  supports the revision of the benefit to New Zealand test. We prefer Option 2, which introduces a simplified benefits test that operates alongside a substantial harm test. We strongly support the removal of the “substantial and identifiable” test. We consider that further consultation is required to ensure that the test will operate with sufficient certainty;

(e)  supports the revision of the counterfactual. We support Sub-option B, which compares what an overseas person would do with the land with what would happen if the vendor continued to own the land, and strongly support the no- detriment test;

(f)  disagrees with all reform options presented in relation to tax arrangements and submits that any such amendments would undermine the objective to reduce unnecessary complexity and ensure compliance costs are proportionate to risks.

Decision timeframes

NZIBF submits that decision timeframes require significant improvement. We support the Treasury’s proposals to introduce statutory timeframes and have no preference between the Options presented. We consider that the OIO should be required to publish its reasons for requesting extensions to the statutory decision timeframe, and be subject to regular review of its extension practices.

Standing consents

NZIBF considers that regular investors should benefit from a standing consent. NZIBF:

(a)  supports the Treasury’s proposal to make standing consents available for the investor test; and

(b)  recommends that consideration be given to developing a standing consent process for repeat investors who satisfy certain criteria and who make multiple applications to invest in similar activities in the same sector.

Treasury guidance

NZIBF considers that the Treasury should play a greater role in providing guidance to, and monitoring the performance of, the Overseas Investment Office (“OIO“), in order to ensure the Act is being applied in a consistent manner and in accordance with its policy intent. We propose an amendment to the Act to empower the Treasury to issue guidance.

Definition of overseas person as it applies to bodies corporate

We agree with the Treasury’s summary of the problems associated with the current law and practice.

We prefer Option 1, which increases the percentage of overseas ownership from 25% to 49%. However, in our view, this Option 1 should be expanded to apply to not only listed companies, but all domestically incorporated bodies corporate subject to the Act. Extending this option to New Zealand incorporated companies would:

(a)  be entirely consistent with the Treasury’s explanation of the purpose of the 49% threshold which is to better target the regime at entities where the majority of economic returns associated with sensitive assets flow offshore;

(b)  would significantly reduce compliance costs (and investment disincentives) for New Zealand companies that that are majority owned and controlled and usually viewed as fundamentally New Zealand companies; and

(c)  would significantly free up OIO resources to focus on higher risk applications and address many of the current issues with the operation of the regime, including in relation to processing delays.

We understand that the Treasury has limited Options 1 to 3 to listed bodies corporate on the basis that the risks associated with investment by listed entities are mitigated by other legislative settings, such as the obligation to disclose substantial holdings or the regulator’s ability to easily determine whether a listed company is more than 49% owned by overseas persons. The Treasury notes that these settings reduce the risk of avoidance and makes enforcement more straightforward.

We do not agree that there is a lack of comparable oversight for non-listed bodies corporate. To the contrary, we consider that the various statutory requirements to update information with the Companies Office (such as the requirement to submit an annual return) provides sufficient (and arguably greater) oversight of a company’s shareholding. That information would allow the OIO to easily and accurately determine whether a company is more than 49% owned by overseas persons. Accordingly, we consider there is no compelling policy reason to treat non-listed entities differently under Option 1.

While our preference is Option 1, we also support the position in Option 2, in the case of listed bodies corporate, that non-associated interests of less than 5% should be excluded from counting towards the threshold. This aligns with the substantial product holder disclosure requirements imposed by financial markets legislation, and recognises the low risk presented by non-associated holders of less than 5% who cannot exercise any material degree of influence or control over the entity. In our view Option 1 and 2 should both be applied.

We also support the exemption application process that is set out in Option 4, and which provides frequent or New Zealand linked investors with the opportunity to apply for an exemption based on a set of criteria (to the extent they are not covered by Option 1 and 2). An exemption application process provides a key mechanism for addressing the disproportionate impacts of the Act that work against the balance between investment and protections. In relation to this Option 4, we wish to highlight the importance of ensuring that the exemption criteria are not too narrowly expressed so as to undermine the effectiveness of its application, and that the OIO applies these exemptions in a pragmatic way. For example, it would seem unnecessary to always require that an applicant has received consent for at least two investments. Additional factors could be included covering, for example, providing options to address issues faced by iwi entities.

Technical issue: Tipping point for requiring consent

NZIBF agrees with the Treasury’s summary of the problems with the current law and practice.

We prefer Option 2, with an amendment to provide that, in instances where an investment causes an entity to become an overseas person, consent is required only where the investor acquires a 25% or more ownership or control stake (that is, negative control over the investment).

We submit that it is disproportionate to require an investor to obtain consent for a minority interest in a New Zealand entity. The existing requirements place a significant burden on the prospective overseas investor to demonstrate a benefit to New Zealand where their investment is minor and does not result in a controlling stake in the entity. Conversely, our proposed alternative would encourage investments in New Zealand by overseas entities not seeking a controlling interest, by eliminating the burdens associated with the application process (and the benefits test, in particular).

This proposed alternative could be applied in conjunction with the revised “overseas person” threshold of 49% discussed above, or to the status quo.

Technical issue: Incremental investments above a 25 per cent interest

NZIBF agrees with the Treasury’s summary of the problems with the current law and practice, and in particular, that it is unclear why the Act needs to screen incremental investments by existing investors in an entity that do not cross important control thresholds.

In our view, this issue is particularly significant in the context of consent applications for sensitive land interests. Given the difficulties associated with satisfying the benefits test, it is overly onerous to require investors to demonstrate benefits in the context of minimal shareholding increases that have no material consequence on the management of the sensitive land. As identified in the Consultation Document, the compliance costs and administrative burdens far outweigh the risk posed by such investments, which are made by persons already screened by the OIO in relation to that particular entity.

NZIBF strongly supports Option 1, being to allow an overseas person to increase its control interest by any amount below the relevant key control threshold. We agree that such an amendment is most appropriately inserted into the Act, as opposed to expanding the exemption provisions in the regulations.

We submit that any such amendment should enable the fluctuation of ownership within the boundaries of the control thresholds. For example, where an investor has consent to hold 25% or more securities in an entity, that investor would be allowed to sell some of its shares and then repurchase shares as it pleased, as long as any repurchase did not breach the 50% threshold. This will support flexibility for investors who are subject to buy-back arrangements, for example. We consider that such flexibility is consistent with the general policy approach taken by the Treasury in relation to Option 1 in recognising the minimal effect of changes in ownership that do not breach a key control threshold.

Assessing an investor’s character and capacity

The investor test

NZIBF strongly agrees that there are problems with the current form and application of the investor test applied to business asset and sensitive land applications.

Our members report the “good character” criterion to be a significant issue. The breadth of the test’s application and the evidential requirements imposed by the OIO make the criterion onerous. Many investors report significant time delays and extensive correspondence with the OIO to clear up immaterial or irrelevant allegations, sometimes including allegations or offences that are unrelated to the individual involved in the investment. We strongly support measures that will narrow this criterion.

In addition, NZIBF agrees with the Treasury’s view that the benefits of the “business experience” and “financial commitment” criteria are unclear. These criteria, in our view, only increase compliance costs without adding real value to the OIO’s decision-making process.

Accordingly, NZIBF submits that Option 3 is the most appropriate. A checklist-style approach provides the greatest certainty to investors, while enabling the regulator to efficiently and effectively consider the key matters relevant to the character of relevant overseas persons and individuals with control.

The application of the investor test to New Zealanders

NZIBF supports the removal of the requirement for New Zealanders identified as relevant overseas persons or individuals with control to satisfy the investor test, on the basis that investors incur costs in collating information on New Zealanders who otherwise are not the intended subjects of the Act.

However, we note that improvements to the good character test and the availability of a standing consent for the investor test would address many investor concerns around the unnecessary complexity and associated cost of preparing applications. Accordingly this requirement (if retained) may only be of minimal concern going forward.

The expansion of the scope of the investor test to apply to non-natural persons

We disagree that the investor test should be expanded to allow it to apply to non-natural persons (for example, companies). The continued assessment of character through the individuals with control is most appropriate, as non-natural persons act only by the individuals who control them. Where individuals who act in a manner that is inconsistent with the good character requirements of the Act are no longer individuals with control, we consider it is difficult to justify why their acts should continue to be attributed to a non-natural person.

Standing consent for the investor test

NZIBF strongly supports the introduction of a “standing consent” for the investor test, to apply to both business asset and sensitive land applications.

The repetition of the investor test process is problematic, particularly for large and regular investors in New Zealand. We agree with the Treasury’s assessment that this will have no effect on the management of the risks presented by overseas investment, as we expect investors to be subject to obligations to update the OIO when changes occur.

In order to give the standing consent practical effect we submit that the business experience and financial commitment criteria should be removed. Those factors are investment specific (so, therefore, would not be able to be granted “standing consent”). Their retention would limit the value of the standing consent process.

Screening the impacts of investment

The benefit to New Zealand test

NZIBF agrees with the Treasury’s summary of the problems with the current law and practice. We welcome the proposals to streamline and improve the operation of the benefits test.

We consider that the simplified benefits test proposed as part of Options 2 and 3 present real opportunities to streamline the consideration of benefits, while retaining some of the familiarity of the existing regime. However, NZIBF is concerned that any simplification of the test may narrow the grounds upon which an applicant may rely to demonstrate a benefit to New Zealand. For example, we consider that whether a transaction is being made by a repeat New Zealand linked investor who has a history of bringing benefits to New Zealand should be a relevant factor in the benefits test.

We are also concerned that issues with the current application of benefit factors will continue to have an adverse impact on incentives to investment in New Zealand. Clear direction from the Treasury may be required, including around how factors are weighted and proportionate treatment of lower risk investments or investors.

NZBIF strongly supports the removal of the “substantial and identifiable” test requirement for both Option 2 and 3. In NZBIF’s experience, the application of this test adds significant complexity and uncertainty and, overall, appears to work against a more risk-based and proportionate assessment.

We support Option 2 over Option 3 as the substantial harm test provides more certainty for investors and avoids benefits being required to be established under two different assessments. The simplified benefits test should be sufficient for demonstrating benefits to New Zealand, while the substantial harm test enables the Government to manage serious risk in accordance with narrowly defined circumstances. If Option 3 is adopted, we consider that the factors for consideration should be clearly outlined and that the list of strategically important industry is appropriately narrow.

In relation to Option 4, NZIBF submits that if a national interest test is to apply it should replicate the Australian model where the Ministers consider whether an investment is against the national interest. A broad test that considers positive and negative benefits across all transactions would appear overly broad and could create significant uncertainty, complexity and overreach compared to the status quo. As with the simplified benefits test, we consider that greater clarity is required regarding the operation of a national interest test and the matters considered under that test before we can provide a fulsome response on its suitability.

We submit that further consultation with stakeholders as to the operation of the tests is necessary once the Treasury has developed more detail in relation to preferred options (to the extent such consultation is possible in light of the Government’s tight timeframes).

The counterfactual

NZIBF agrees with the Treasury’s assessment that the counterfactual is complex, and increases uncertainty and compliance costs for prospective investors.

NZIBF prefers Sub-option B, which compares what an overseas person would do with the land with what would happen if the vendor continued to own the land (or, in the case of leases, the leaseholder continued to hold the land), because:

(a)  While Sub-option B appears more uncertain in its reliance on the theoretical future state of the land, it allows the applicant and the decision-maker to consider the likely circumstances if the vendor retained the land. This would include whether the value or productivity of that land would likely depreciate under the vendor’s continued ownership or control (for example, where the vendor is unable to develop the land in the future). This is a preferable approach to Sub-option A, which imports a presumption that the land would remain in its current state for the foreseeable future.

(b)  This Sub-option is more certain and efficient than Sub-option C, which only tweaks the otherwise unworkable status quo. Sub-option C’s utility is limited to circumstances where genuine market testing is used, which would involve further compliance costs and potential delays.

In addition, NZIBF strongly supports the introduction of a “no-detriment test” for transfers as between two overseas persons. In NZIBF’s experience, many overseas investments are well-managed assets, placing an onerous burden on a prospective overseas purchaser to identify additional benefits (particularly “substantial and identifiable” benefits).

We consider that any provision giving effect to a “no-detriment test” should clearly direct the OIO to consider the question of whether benefits to New Zealand are being maintained “in the round”, as opposed to requiring that benefits associated with the vendor are specifically matched by the purchaser. For example, if the vendor had committed to certain levels of employment, the purchaser should not be required to commit to those same levels, assuming another equivalent benefit could be demonstrated elsewhere. This would encourage innovation in the management of the asset, and would provide comfort to purchasers that the benefits they have committed to would not raise issues in the event of a future sale to another overseas person.

Tax and the Act

NZBIF submits that none of the reform options outlined on pages 85 and 86 of the Consultation Document should proceed, as all of the options would increase compliance costs, while not providing information that is likely to be useful to the OIO, at least without the assistance and analysis of professional tax advisors. Those reform options would also have the opposite effect to the objective that the reform “seeks to reduce unnecessary complexity and ensure that compliance costs are proportionate to risks” (see the Ministerial foreword, page 1 of the Consultation Document).

NZBIF submits that it is not the case that New Zealand’s tax laws are not working, or are not being enforced and, accordingly, there is no need for the Act to allow investment to be refused because of “a concern about overseas persons … not paying enough tax in New Zealand”. Even if it were the case that New Zealand’s tax laws are not working, or are not being enforced, the appropriate way to address such concerns would be through the tax system (ie, appropriate resourcing of Inland Revenue and, if necessary, tax law reform).

The NZIBF notes that foreign investors in New Zealand businesses and assets can be expected to pay increased amounts of New Zealand tax following the tax reforms implemented by the Government in recent years. For example, the Minister of Revenue said, in respect of the reforms contained in the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018, “[t]his legislation will ensure that multinationals pay tax based on the actual economic activity they carry out in New Zealand.”1 Also in relation to that legislation, the Minister of Revenue stated that “[m]ost multinationals operating here pay the tax they should and are compliant.”

Timeframes for decisions

NZIBF is highly concerned with the length of time taken by the OIO and Ministers to issue a decision under the current framework of the Act. These timeframes are long, and (when combined with the uncertainty of the tests applied) make investment in New Zealand unattractive. Despite the introduction of monitoring by the OIO in recent years, decision timeframes have not improved in any material way.

Accordingly, NZIBF supports the introduction of time limits for consent decisions. NZIBF has no preference as between Options 1 and 2, but makes the following observations about the operation of any deadlines imposed:

(a)  NZIBF is concerned about the capacity of the OIO to meet the timeframes suggested in the Consultation Document. Any introduction of statutory timeframes would need to be accompanied by an appropriate boost in the OIO’s resources.

(b)  NZIBF notes concerns raised in the Consultation Document that a statutory deadline may encourage the OIO to decline an application where it determines that it will not be able to satisfactorily consider the application in time. NZIBF agrees that this is of concern, but considers that this would be mitigated by:

(i)  the appropriate and effective use of extension powers by the OIO. In our view, applicants would be willing to consider appropriate extensions if difficult questions or issues were raised by an application and they were appropriately consulted by the OIO; and

(ii)  the introduction of a merits review power, as discussed in the Consultation Paper in relation to a revised benefits test. This would provide assurances that the OIO could not decline an application without sufficient reasons to do so (and that, in such an event, a remedy would be available).

(c)  To address concerns about the appropriate and effective use of extension powers, we consider that the OIO should be required to publish its reasons for requesting extensions to the statutory period, and be subject to regular review of its practices by an appropriate body, such as the Treasury. This will provide comfort to investors that the power is used appropriately and avoids perverse outcomes.

1 Hon Stuart Nash “Multinationals to pay fair share of tax” (press release, 26 June 2018).

Sub-options: when should timeframes commence?

NZIBF strongly supports the approach proposed in Sub-option B, whereby the OIO has a set period once the application is received to determine whether additional information is required and request it from an applicant.

NZIBF appreciates the OIO’s need to make requests for further information where the information provided in a consent application is both vast and technical. We submit that Sub-option B is preferable to meet this need as it:

(a)  aligns closely with the quality assurance process currently adopted by the OIO and accepted by investors;

(b)  is a suitable balance between ensuring that deadlines imposed by the Act have “teeth”, while recognising that further information may be required and that this can place pressure on statutory deadlines;

(c)  encourages applicants to submit quality applications, while recognising that they may not always be able to pre-empt the OIO’s needs in certain circumstances and reasonably allowing for those circumstances; and

(d)  ensures that requests for information are not used to avoid the statutory timeframe.

We consider that this option will be attractive to both investors and officials as a suitable balance between investor certainty and the OIO’s interest in obtaining all relevant information to enable it to make a satisfactory decision.

Further comments: improvement of the OIO’s processes

Expansion of the standing consent regime to capture repeat investors in sensitive land

While not a proposal or option in the Consultation Document, we recommend that consideration be given to developing a standing consent process that would be available to repeat New Zealand investors who satisfy certain criteria and who make multiple applications to invest in similar activities in the same sector and where benefits are clearly likely to arise. This could be combined with the standing consent for the investor test. At the very least a fast track process is required for such investors and / or direction given that they be treated as low risk investors and that the assessment process be simplified in response.

Monitoring and guidance

As a more general note, NZIBF has concerns about the current operation of the OIO and its capacity to efficiently and effectively apply the tests set out under the Act.

In our view, the OIO has, in some instances, interpreted the Act and its regulations too strictly or in a manner inconsistent with the intent of the legislation. We consider that the OIO may not have the necessary guidance or support to interpret and apply the Act as intended, and therefore is defaulting to narrow interpretations that are having disproportionate effects on investors. Some of these issues may be resolved as a result of this consultation, but we consider in particular that the application of the existing benefits test or any of the proposed alternatives in the Consultation Document will still raise issues (particularly in the early stages of their application).

Accordingly, we consider it would be appropriate for the Treasury (or other body the Treasury considers more suitable) to perform a greater guidance / monitoring function in relation to the OIO, to the extent that this is possible within the legislative framework.

The Act currently enables Ministers to issue Ministerial directive letters that direct the OIO on a range of matters set out in section 34 of the Act. While these are useful in ascertaining the Government’s policy approach, expectations around consent conditions and other matters, we consider there is a greater need for the OIO to be supported and guided in the judgements that underpin the decision-making in the Act. This is a wider scope than is currently enabled by section 34.

To achieve this, we envisage empowering the Treasury (or other body) to issue guidance or advice on these principles. By way of example, this could be aligned with section 46 of the Official Information Act 1982, which provides:

The Ministry of Justice may, for the purpose of assisting any other department or any organisation to act in accordance with this Act, furnish advice or assistance or both to that other department or that organisation.