Implication of Australia s measures for its non-discrimination obligations under the OECD Codes of Liberalisation

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1 Organisation for Economic Co-operation and Development DAF/INV(2017)33/FINAL DIRECTORATE FOR FINANCIAL AND ENTERPRISE AFFAIRS INVESTMENT COMMITTEE English - Or. English 9 February 2018 Implication of Australia s measures for its non-discrimination obligations under the OECD Codes of Liberalisation (Report by the Investment Committee) JT This document, as well as any data and map included herein, are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

2 2 DAF/INV(2017)33/FINAL REPORT BY THE INVESTMENT COMMITTEE 1. Introduction 1. Under the Code of Liberalisation of Capital Movements (CLCM) and Code of Liberalisation of Current Invisible Operations (CLCIO) (hereafter, "the OECD Codes"), Members have the obligation not to discriminate among Codes' Adherents (Article 9). Together with the obligation of progressive liberalisation and standstill, nondiscrimination is considered as one of the core principles of the OECD Codes, as well as OECD Accession Roadmaps. 2. Australia s discriminatory measures 2. Since 2005, Australia has adopted a succession of measures through bilateral or regional Preferential Trade Agreements (PTAs) which give preferential treatment to selected Codes Adherents and other non-adherent countries such as the People s Republic of China, Singapore and Thailand. These measures take the form of: 1) increased screening thresholds for land and non-land investments by investors from treaty partners below which no prior approval is required; 2) exemptions granted to some treaty partners from the Foreign Acquisitions and Takeovers Act 1975 for acquisitions of interests in financial sector companies; and 3) authorisation some Codes Adherents to establish branches of life insurance companies. Annex A provides detailed information. 3. Pursuant to Article 9 of the OECD Codes: A Member shall not discriminate between other Members in authorising the conclusion and execution of transactions and transfers which are listed in Annex A and which are subject to any degree of liberalisation. 4. Discrimination among Codes' Adherents is contrary to Article 9 of the Codes and may not be the subject of reservations under the Codes. The importance of the nondiscrimination principle has been underlined as a core principle in all accession examinations under the OECD investment instruments. Article 10 provides an exception to the non-discrimination principle only for those adherents "forming part of a special customs or monetary system". Australia's PTAs do not fall into this category. 3. Discussions within the Investment Committee 5. Australia s measures in breach of Article 9 have been subject to extensive review by the Investment Committee, which has discussed the matter on five different occasions, since In 2009, upon proposal by the Committee, the Council urged Australia to normalise, at an early date, the situation with respect to its obligations under the Codes [C(2009)95]. The Committee reiterated this position several times since. 1 1 The Investment Committee: i) in September 2005 heard the notification by the Australian authorities of the preferential treatment under the Australia-United States Free Trade Agreement [DAF/INV/WP/M(2005)2]; ii) in June 2009 the OECD Council, on the basis of a report transmitted by the Investment Committee, urged Australia

3 DAF/INV(2017)33/FINAL 3 6. The Committee maintains that the discriminatory measures taken by Australia breach the country s commitment to non-discrimination between Adherents to the OECD Codes as per Article 9, and continues to urge the Australian authorities to regularize the country's position vis-à-vis the OECD Codes by extending the liberalisation benefits of PTAs on an erga omnes basis to all Codes' Adherents. 7. Australia s continued breach of Codes Article 9 undermines the credibility of key substantive OECD s instruments such as the Codes and contrasts with the position of most OECD economies including G7 countries and the EU- which have refrained from preferential treatment in their recent negotiations of PTAs as far as operations covered by the Codes are concerned and have therefore observed the non-discrimination principle of the Codes. 4. Australia s views 8. The Committee takes note that Australia, while being "aware of the provisions of the Codes" [DAF/INV/WP/M(2005)2], has not indicated any plans to regularise its position under the Codes, and has continued to introduce new measures that are contrary to the obligation of non-discrimination of the Codes. 9. Moreover, Australia has suggested considering, in the context of the ongoing review of the Code, the interaction between the Most Favoured Nation (MFN) principle under the Codes and progressive liberalisation through the adoption of bilateral or regional PTAs [DAF/INV/M(2016)6]. Other Codes' Adherents, such as New Zealand and Korea have also pointed that the limited scope of Article 10 of the Codes, as an exception to Article 9, should be reconsidered to allow for example Free Trade Agreements (FTAs) to qualify as exception to Article 9. Notwithstanding the MFN discussion under the Code s review process, current obligations continue to apply until agreement is reached among all Adherents on any modification to their Code's obligations, as established in the terms of reference of the review [DAF/INV(2016)32]. 10. At its meeting in October 2016, the Investment Committee also noted that Australia's situation is different from that of other Codes' adherents with regards to the obligations of Article 9 of the Codes, as the Council has urged Australia to normalise its position since 2005, but since then the country has taken further discriminatory measures. In a March 2016 letter to the Chair of the Investment Committee, Australia stated that it is committed to promoting investment liberalisation through multilateral, plurilateral and bilateral processes, but that given the current situation with regard to multilateral to normalise at an early date its situation with respect to its obligations under the Codes. [C(2009)95]; iii) in March 2014 encouraged Australia to consider the issue of preferential treatment under the Investment Protocol to the Australia New Zealand Closer Economic Relations Trade Agreement (ANZCERTA) [DAF/INV(2014)2/FINAL]; iv) in March 2015 reiterated its position and referred to higher screening thresholds to investors from Korea, Japan and Chile, as well as to some non-codes' Adherent countries (People s Republic of China) [DAF/INV/M(2015)2];) after this meeting, also requested the OECD Directors for Legal Affairs and for Financial and Enterprise Affairs to write to the Australian authorities to remind them of Australia s obligations and of the discussions taking place at the Investment Committee; v) in March 2016 urged Australia to regularise its position under the Codes [DAF/INV/M(2016)3]; vi) in October 2016 agreed that the possibilities for discussion had been exhausted at Committee level and that a report should be sent to the Council [DAF/INV/M(2016)6].

4 4 DAF/INV(2017)33/FINAL trade liberalisation processes, Australia has focused on achieving liberalisation through the conclusion of comprehensive bilateral and plurilateral free trade agreements with key trading partners, and that consistent with this focus on free trade agreements, the Australian government has prioritised the implementation of trade and investment agreement commitments. 11. After a renewed request for information from the Secretariat, the Australian authorities informed the Organisation on 25 May 2017, that in relation to the key matters of interest to the Investment Committee regarding the non-discrimination provisions of the Codes (i.e. the investment screening thresholds), there are no new developments nor policy change from the Australian Government compared to the draft note considered by the Committee last year. 12. In November 2017, Australia restated its commitment to non-discrimination as a general principle guiding its investment policy and indicated that its investment screening rules continue to be assessed and reviewed taking into account Australia s evolving free trade agreement landscape and the Codes obligations. 5. Conclusions of the Committee THE COMMITTEE: a) welcomed Australia s commitment to non-discrimination as a general principle guiding its investment policy and that its investment screening rules continue to be assessed and reviewed taking into account Australia s evolving free trade agreement landscape and the Codes obligations; b) urged Australia to normalise, as soon as possible, its situation with respect to its obligations under Article 9 of the OECD Codes of Liberalisation; c) requested Australia to report back to the Committee on progress made by March 2018; d) noted that the non-discrimination provisions of the Codes have been the subject of discussions several times in the past and that these discussions, including with respect to the situation under other international agreements, should continue, as appropriate within the Committee; e) agreed to declassify the present report.

5 DAF/INV(2017)33/FINAL 5 Annex A. Description and Assessment of the Conformity of Australia s Measures under the Codes Description of the measures 1. Higher screening thresholds of foreign investments for treaty partners: 1.1 For non-land foreign investments 1. In recent years Australia has raised the screening thresholds of foreign investments that require approval for treaty partners, therefore granting treaty partners more favourable treatment than that available to investors from other countries. 2. Australia has extended higher screening thresholds to investors from the following Codes Adherents: United States, under the Australian-United States Free Trade Agreement, which entered into force on 1 January 2005; New Zealand, as a result of the entry into force of ANZCERTA on 1 March 2013; Korea, as a result of the Korea-Australia FTA (KAFTA) which entered into force on 12 December 2014; Chile, since 12 December 2014 through a ratchet mechanism 2 and Most-Favoured Nation (MFN) provision 3 ; Japan, as a result of the Japan-Australia Economic Partnership Agreement (JAEPA) which entered into force on 15 January In addition to these trade agreements with Codes Adherents, Australia has also applied higher screening thresholds to some non-codes Adherent countries. In particular, higher screening thresholds are applied to Chinese investors as a result of the China Australia Free Trade Agreement (ChAFTA) which entered into force on 20 December On 4 February 2016, Australia signed the Trans-Pacific Partnership Agreement (TPP) which has not yet entered into force. The Agreement provides for signatory countries screening thresholds equivalent to those for Chinese investors through MFN treatment 4. The countries which could benefit from the TPP are two additional Codes Adherents, namely Canada and Mexico, as well as five non-codes Adherent countries, Brunei Darussalam, Malaysia, Peru, Singapore and Vietnam. 5. The Australian authorities have also reported the implementation, in a letter dated 15 January 2016, of a AUD 55mln screening threshold for foreign investment in Australian agribusiness, applying to all non-government investors except those from the 2 Article 10.9 Paragraph 1(c) of the Australia-Chile FTA provides the ratchet mechanism. 3 Article 10.4 of the Australia-Chile FTA provides MFN treatment. 4 Article 9.5 of the Trans-Pacific Partnership Agreement provides MFN treatment.

6 6 DAF/INV(2017)33/FINAL United States, New Zealand and Chile, who will require prior approval if acquiring a substantial interest (20 per cent or more) in an agribusiness valued above AUD 1,094mln. 6. Screening thresholds for non-land foreign investments, which are currently in force, are summarised in Table 1 below. Table 1. Screening thresholds for foreign investments (non-land) 5 Investor Action Threshold more than: From PTA partner countries that have the higher threshold 6 Acquisitions in non-sensitive businesses Acquisitions in sensitive businesses 7 $1,094 million $252 million Media sector 8 $0 Agribusinesses For Chile, New Zealand and United States, $1,094 million. For China, Japan, and Korea, $55 million (based on the value of the consideration for the acquisition and the total value of other interests held by the foreign person (with associates) in the entity) Other investors Business acquisitions (all sectors) $252 million Foreign government investors Media sector $0 Agribusinesses $55 million (based on the value of the consideration for the acquisition and the total value of other interests held by the foreign person (with associates) in the entity) All direct interests in an Australian entity or $0 Australian business Starting a new Australian business $0 Source: Australian Government, Foreign Investment Review Board. 1 July Operations affected by the investment screening process requiring approval are covered by item I/A Direct Investment of the Code of Liberalisation of Capital Movements (CLCM). 1.2 For agricultural and commercial land 8. Changes to foreign investment screening in agricultural land 9 have been enacted from 1 March 2015, to the effect that the screening threshold for purchase has been 5 All monetary screening thresholds are presented in Australian dollars (AUD). 6 Countries with a PTA currently in force are: Chile, People s Republic of China (hereafter China), Japan, New Zealand, Korea and the United States. Once the Trans Pacific partnership comes into force, it will also include: Brunei, Canada, Malaysia, Mexico, Peru, Singapore and Vietnam. 7 Sensitive businesses include media; telecommunications; transport; defence and military related industries and activities; encryption and securities technologies and communications systems; and the extraction of uranium or plutonium; or the operation of nuclear facilities. 8 For investments in the media sector, a holding of at least five per cent requires notification and prior approval regardless of the value of investment. 9 The Australian authorities have reported that Australian land includes: agricultural and commercial land, mining and production tenements, and residential land. The various types of land and the applicable thresholds are defined in the Foreign Acquisitions and Takeovers Act Policy document available here:

7 DAF/INV(2017)33/FINAL 7 reduced from AUD 252mln to AUD 15mln (to apply to the cumulative value of agricultural land holdings by the foreign investor including the proposed purchase). 9. This new threshold does not apply to the following investors from PTA partner countries: the United States, New Zealand and Chile, where the screening threshold is of AUD 1,094mln; and for Singapore and Thailand, where the screening threshold is of AUD 50mln. 10. In addition, the 2015 reforms have raised the threshold for developed commercial land from AUD 55mln to AUD 252mln for non-sensitive properties. 11. Table 2 summarises screening thresholds for agricultural and commercial land, currently in force. Table 2. Overview of investment screening thresholds for land in Australia 10 Investor Action Threshold more than: All investors Residential land $0 Privately owned investors from PTA partner countries that have the higher threshold 11 Privately owned investors from non-pta countries and PTA countries that do not have the higher threshold Agricultural land For Chile, New Zealand and United States, $1,094 million For China, Japan, Korea, $15 million (cumulative) Vacant commercial land $0 Developed commercial land $1,094 million Mining and production tenements For Chile, New Zealand and United States, $1,094 million Others, $0 Agricultural land For Singapore and Thailand, where land is used wholly and exclusively for a primary production business $50 million (otherwise the land is not agricultural land) Others $15 million (cumulative) Vacant commercial land $0 Developed commercial land $252 million Low threshold land 12, $55 million Mining and production tenements $0 Foreign government investors Any interest in land $0 Source: Australian Government, Foreign Investment Review Board. 1 July Operations affected by the screening threshold for investments in agricultural and commercial land comprise both real estate investments (covered under item III/A of the CLCM), as well as measures restricting access by non-residents to land for business purposes (covered under item I/A of the CLCM). 2. Measure exempting some treaty partners from the Foreign Acquisitions and Takeovers Act 1975 for acquisitions of interest in financial sector companies 13. In March 2015, the Australian authorities notified the Organisation that Chile, Japan, Korea and China would obtain an exemption from the Foreign Acquisitions and 10 All monetary screening thresholds are presented in Australian dollars (AUD). 11 See Footnote Low threshold land includes mines and critical infrastructure (for example, an airport or port).

8 8 DAF/INV(2017)33/FINAL Takeovers Act 1975 of acquisitions of interest in financial sector companies, as defined by the Financial Sector (Shareholdings) Act Financial sector companies, as per the definition of the Financial Sector (Shareholdings) Act 1998, include: i. authorised deposit-taking institutions; or ii. authorised insurance companies; or iii. holding companies of a company covered by paragraph a) or b). 14. Operations covered by the new exemption for selected Codes Adherents are covered by item I/A Direct Investment of the CLCM. 3. Measure allowing the establishment of branches of life insurance companies, by life insurance companies incorporated in Korea and Japan 15. In March 2015, the Australian authorities notified the Organisation that life insurance companies incorporated and regulated in Korea and Japan would have the ability to seek approval to establish branches in Australia to conduct life insurance business, as is also the case for China, New Zealand, and the United States Operations covered by the new exemption for selected Codes Adherents are covered by item I/A Direct Investment of the CLCM and item D/6 Conditions for establishment and operation of branches and agencies of foreign insurers of the CLCIO. 13 Amendment to the Life Insurance Regulations 1995, Part 2B-2B.01

9 DAF/INV(2017)33/FINAL 9 Annex B. The Codes and Preferential Bilateral or Regional Agreements: Precedents 17. Pursuant to Article 9 of the OECD Codes: A Member shall not discriminate between other Members in authorising the conclusion and execution of transactions and transfers which are listed in Annex A and which are subject to any degree of liberalisation. 18. The Codes admit only one exception to the principle of non-discrimination. Adherents forming part of a "special customs or monetary system" are permitted to apply to one another additional measures of liberalisation without extending them to other Adherents (Article 10). 19. Under the current understanding on the Codes, only the Belgium-Luxembourg Economic Union and the European Community/European Union have been recognised as special customs or monetary systems within the meaning of Article In the case of the Canada-United States Free Trade Agreement, allowing for preferential liberalisation in certain areas covered by the Codes, the Council urged the Canadian authorities to normalise, at an early date, the situation with respect to their obligations under the Codes of Liberalisation [C(90)38 and C/M(91)19/PROV]. Subsequently, Canada extended to all OECD Member countries the liberalisation measures adopted under the Agreement that offered more advantageous treatment of United States investors in areas covered by the Codes. 21. The Czech Republic [C(95)188], Hungary [C(96)19], Poland [C(2001)243] and the Slovak Republic [C(2000)114] extended to all OECD Members any liberalisation measures taken under the association agreement with the European Union ( Europe Agreement ) and avoided discriminating among OECD countries in the event of recourse to the safeguards clause of that Agreement. 22. Mexico extended the benefits of NAFTA to all OECD Members [C(98)64]. In the case of the Australian-United States Free Trade Agreement, which allows preferential liberalisation for residents from the United States in certain areas covered by the Codes, Australia had agreed to normalise, at an early date, the situation with respect to its obligations under the Codes, as urged by the Council [C(2009)95]. 14 See comments to Article 10 of the Codes on the OECD Codes of Liberalisation User's Guide 2008.