On 5 October 2015, Trade Ministers of 12 Pacific-rim countries negotiating the Trans-Pacific Partnership Agreement (TPPA) announced the formal conclusion of negotiations. The TPPA is a free trade agreement between New Zealand, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, Peru, Singapore, the United States and Viet Nam (TPP Countries). The TPPA is expected to come into force within two years, once the TPP Countries have completed their domestic legislative processes.1
The full text of the TPPA was made available to the public on 5 November 20152 and the New Zealand Ministry of Foreign Affairs and Trade (MFAT) has published New Zealand-specific factsheets on the content of the TPPA.3 Our comments below are based on a review of the MFAT factsheets and the full text of the Investment chapter (Chapter 9) of the TPPA.
One of the aims of the TPPA is to promote increased investment by investors from TPP Countries in other TPP Countries, while acknowledging existing investment screening regimes already in place.
Overseas investment into New Zealand is subject to the Overseas Investment Act 2005 (Act) and the Overseas Investment Regulations 2005 (Regulations). The Act acknowledges that it is a privilege for overseas persons to own or control sensitive New Zealand assets, by requiring overseas investments in those assets to meet criteria for consent before being made, and by imposing conditions on those overseas investments. The Act and the Regulations require an overseas investor to apply to the Overseas Investment Office (OIO) for consent before investing in "significant business assets" or "sensitive" New Zealand land.
This article examines the extent to which the TPPA will affect New Zealand's overseas investment regime.
Overseas Investment in Sensitive Business Assets – Current Position
Investments in "significant business assets" include the acquisition of business assets with a value of more than $100 million, or interests of at least 25% in companies that have assets valued at more than $100 million. Australian investors benefit from a higher asset threshold for investments in "significant business assets."4
Overseas investments in significant business assets need to be approved by the OIO, but the criteria that must be satisfied are less onerous than those for investments in sensitive land. To obtain OIO approval the overseas person must satisfy the OIO that they:
- Have business experience and acumen relevant to the investment;
- Have demonstrated financial commitment to the investment;
- Are of good character; and
- Are not an individual referred to in sections 15 or 16 of the Immigration Act 2009 (which list certain persons not eligible for visas or entry permission).
Overseas Investment in Sensitive Land – Current Position
Investments in "sensitive" New Zealand land include all purchases of non-urban land of more than 5 hectares, as well as smaller land purchases where the land has other sensitive features, such as including or adjoining reserves, conservation land, historic places, lakes or the foreshore. An overseas person wishing to invest in sensitive land must meet the good character and business experience criteria that apply to investments in significant business assets (as listed above). In addition, they must satisfy the OIO that either:
- They intend to reside in New Zealand indefinitely; or
- The overseas investment will, or is likely to, benefit New Zealand and where the land is non-urban land exceeding 5 hectares, that benefit will or is likely to be, substantial and identifiable.
Effect of the TPPA on the Overseas Investment Regime
Preferential Screening Threshold for Investments in Significant Business Assets
The most immediate change to the overseas investment regime resulting from the TPPA is that the TPP Countries have agreed to offer preferential screening thresholds for all other TPP Countries. To give effect to this, the New Zealand Government has agreed that the threshold for OIO approval for investments in "significant business assets" will increase to $200 million for TPP Countries. This will mean that investments of less than $200 million will not be subject to OIO approval and the "good character" and "business experience" investor tests.
It is important to note that if the assets being acquired by an overseas person as part of a business acquisition include any sensitive New Zealand land, the investment will still require OIO consent even if it falls within the $200 million dollar threshold. The $200 million threshold will only exclude investments in New Zealand business assets where no sensitive land is being acquired as part of the investment. Investments in sensitive New Zealand land will continue to be subject to approval by the OIO regardless of their dollar value.
The MFAT resources note that some provisions in the Investment chapter of the TPPA, including the higher $200 million screening threshold, will flow through to New Zealand's free trade agreements with China, Chinese Taipei and Korea, in which there are "most favoured nation" provisions.
National Treatment Subject to Continued Right to Screen Investments in New Zealand
The TPPA contains general provisions that effectively mean New Zealand cannot treat investors from TPP Countries any differently than it treats New Zealand investors.
However, New Zealand will retain the right to screen all foreign investments that are currently subject to the Act and Regulations (subject only to the increased threshold for investments in significant business assets) and purchases of sensitive land will still have to meet a "benefit to New Zealand" test. New Zealand is not obliged to relax the criteria in the Act or Regulations to give preferential treatment to the TPP Countries. This is because the general obligations in Chapter 9 are subject to existing "non-conforming" measures that have been recognised and accepted by the TPP Countries. This is achieved using a "negative list" approach - each TPP Country's "negative list" sets out the existing measures that the TPP Country is permitted to maintain, despite being contrary to the general nature of the Investment provisions of the TPPA.
The "negative list" consists of two parts: Annex I and Annex II. Annex I sets out existing measures that can be maintained provided they are not made more restrictive in the future. Annex II sets out existing measures that can be maintained but also freely amended, notwithstanding that the amendments may increase the non-conformance with the provisions of the TPPA.
Annex I of New Zealand's negative list refers to the need for approval for overseas investments in significant business assets (with reference to the new $200 million threshold for TPP Countries) and sensitive land. Under Annex II of its negative list New Zealand reserves the right to adopt or maintain any measure that sets out the approval criteria to be applied to the categories of investments that require approval under its overseas investment regime. The effect of this is:
- New Zealand cannot change (i.e. increase) the types of overseas investments that require approval under the overseas investment regime;
- New Zealand can change the criteria to be applied to overseas investments that require approval.
The TPP Countries have accepted that New Zealand is entitled to continue to screen foreign investments in significant business assets and sensitive land through the OIO and require investments in sensitive land to meet a "benefit to New Zealand" test.
The "criteria" for the approval of sensitive land acquisitions include satisfaction of the "good character" and "business acumen" tests, and satisfying the OIO that the investment will or is likely to benefit New Zealand (in a substantial and identifiable way where the land being purchased is non-urban land over 5 hectares). The Act and Regulations set out factors for assessing whether the "benefit to New Zealand" test is satisfied. While these factors are not expressly referred to in Annex I or Annex II, we suggest that as New Zealand has full discretion over the approval criteria, the factors that assist in applying those criteria are likely to also be considered to be freely changeable.
However, in describing the existing regimes, Annex I and Annex II each simply refer to overseas investments in "sensitive land". What is not clear is whether New Zealand has the right under the TPPA to amend the description of "sensitive land" under the Act, for example by expanding the definition to cover a wider range of land acquisitions, or reducing land area thresholds. Arguably, because the "nature" of investments subject to the regime is referred to in Annex I, while Annex II refers to the approval criteria, an attempt to amend the "sensitive land" definition could be met with a challenge from one of the TPP Countries.
Applying the Benefit to New Zealand test – New Zealand's International Obligations
The Act and Regulations contain factors that must be considered by the OIO in assessing whether an overseas investment in sensitive New Zealand land will or is likely to benefit New Zealand. Regulation 28(c) requires consideration of whether refusing the application for consent will, or is likely to (i) adversely affect New Zealand's image overseas or its trade or international obligations, or (ii) result in New Zealand breaching any of its international obligations.
In past applications, the OIO has often commented on this factor with a statement along the following lines:
The issue with this approach is that it seems to place greater weight on the other factors in the Act and Regulations, by stating that a well reasoned decision (effectively based on those other factors) would mean Regulation 28(c) was not met. However, Regulation 28(c) is one of those factors that should be considered in reaching the decision.
The OIO's approach as outlined above does not consider Regulation 28(c) as a stand-alone factor, effectively making the factor in Regulation 28(c) redundant and potentially making decisions open to a legal challenge as to the weight given to that factor. However, given the express recognition of New Zealand's existing overseas investment regime in the TPPA, we do not consider that proper application and consideration of this factor would likely result in a different outcome in any application made by a TPP Country.
Investor State Dispute Settlement Mechanism
The TPPA Investment chapter contains an "investor state dispute settlement (ISDS) mechanism" that allows foreign investors to pursue remedies directly against a TPP Country in relation to breaches of the TPPA investment provisions. New Zealand has secured a country-specific exception which means government decisions under the Act to grant or decline consent for foreign investment are not subject to ISDS.
1 In New Zealand, this includes a Parliamentary treaty examination process, where the TPPA and a National Interest Analysis is presented to Parliament for examination by the Foreign Affairs, Defence and Trade Select Committee. The public will be invited to make submissions as part of the consultation process. Legislative changes required to implement the TPPA will then go through normal Parliamentary procedures, including select committees.
4 The Overseas Investment (Australia) Amendment Regulations 2013 increased the threshold for Australian non-Government investments to $477 million.
5 Under powers delegated by the responsible Ministers, the OIO has the power to make final decisions on some OIO applications. For non-delegated applications, the OIO makes a recommendation to the responsible Ministers, who are responsible for the final decision. References in this article to OIO approval include approval by the Ministers where applicable.
6 "Most Favoured Nation" provisions require that any better treatment relating to investment that New Zealand extends to other countries must also be extended to these FTA partners.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.