Too Taxing for Officials
I thank the Committee and Secretariat for the work carried out in the conduct of this inquiry.
The Committee seems content with the actions of Government to date with measures such as Multinational Tax Avoidance Legislation which came into effect in December 2015 and implementation of recommendations of the Black Economy Taskforce.
Sadly, much more needs to be done.
Tax transparency data released by the Australian Taxation Office shows that over the past five reported years (2013-14 through 2017-18) more than 220 companies generated revenues of $850 billion dollars and yet didn’t pay a brass razoo in tax.
"Houston, we still have a problem"
In 2017 the Commonwealth Government conducted a strategic water buyback with Eastern Australia Agriculture for $80 million for 29 GL of overland flow water. The Commonwealth paid $2745 per GL, despite an independent valuation stating that the price range should properly sit between $1100 to $2300.
After the sale, Eastern Australia Agriculture booked the cost of the water as $27 million and then booked the sale as $52 million. The company then shared $43 million of that profit with its Cayman Islands domiciled related entity, Eastern Australia Irrigation. If one were kind to Mr Barnaby Joyce MP, the Minister who signed off on the deal, he simply didn’t know that the company he was buying the water off had a related entity in the Cayman Islands, a notorious international tax haven.
In response to questions asked at the Legal and Constitutional Affairs Legislation Committee Estimates hearing on 22 October 2019, the Australian Government Solicitor and Attorney‑General’s Department were asked about the due diligence associated with the purchase. The conversation went as follows:
Senator PATRICK: So, to your knowledge and not restricting to that particular transaction, has the AGS ever looked at companies or related entities domiciled in tax havens in the course of any due diligence that you are aware of?
Mr Kingston: I can't say from my personal knowledge, but that's a pretty poor indication, frankly, of whether we have, because there will be lots of due diligence operations that I'm not personally aware of.
Senator PATRICK: I will accept on face value that, in principle, it's not something you generally look at, so I will go to the secretary now. Noting that the government purports to have strong multinational tax avoidance policies, is there any reason why you are not instructing due diligence in examining for companies that might be connected to parents, or related entities, in tax havens?
Mr Moraitis: I wouldn't add anything to what Mr Kingston said about how AGS approaches their due diligence role. The clients instruct AGS on these contracts. As a matter of policy, whether there should be a presumption that AGS does this thing in recommending to their clients that they do that, it all depends on the risk matrix. But I take your point, given the larger picture here, that it's something to consider.
"Ignorance seems to be bliss"
The simple measures in this Bill are not intended as a panacea to Australia’s multi-national tax avoidance problems. Rather they add to the toolbox of measures that have been implemented in recent years.
(a)
impose a simple disclosure requirement on those entities seeking contracted work or a grant from the Commonwealth;
(b)
require officials consider the implications of the involvement of an entity domiciled in a tax haven; and
(c)
require the heads of Commonwealth departments and agencies to publish tax haven‑related purchases in their annual reports.
And yet, the two requirements on the Commonwealth’s side of the ledger seem just a little too taxing for officials. It would involve some extra work to protect the taxpayer, and on that basis, the officials seem to resist the proposal.
The Commonwealth claimed that the Bill would pose an extra administrative burden, but failed to demonstrate that they had undertaken any significant examination of the administrative costs of what are very modest measures, nor any assessments of the potential benefits to Commonwealth revenue—even though the single case of the Eastern Australia Agriculture water buyback shows that could be very considerable indeed.
They seemed to be comfortable with the idea that tenderers for projects greater in value than $4 million have to obtain a statement of satisfactory tax record from the Australian Taxation Office (this involves the ATO providing independent verification on whether a potential supplier has compliant tax behaviour).
But having a "satisfactory" tax record does not mean all is well. During testimony at the Economics Legislation Committee Estimates hearing on 5 March 2020, the ATO Second Commissioner talked on the spectrum of tax behaviour:
Mr Hirschhorn: Building on the commissioner's response, if I maybe talk about the spectrum of tax behaviour. At one end we have tax evasion, which is just unlawful. At the other end, we have tax minimisation or planning, which is lawful. In the middle, we have tax avoidance, which is lawful but, because Australia has a set of anti-avoidance rules, is lawful but ineffective if it is detected.
The Bill’s provisions provide Commonwealth officials a further tool to fight against corporate tax avoidance. Every time an entity cheats the Australian Taxation Office they cheat the Australians who do the right thing and they put Australian companies doing the right thing at a competitive disadvantage.
Companies should not benefit from major government contracts while avoiding millions of dollars of tax. Officials must do everything they can to ensure all companies pay their fair share of tax. This Bill would help them do that.
Recommendation
That the Senate pass the Public Governance, Performance and Accountability (Tax Transparency in Procurement and Grants) Bill 2019.
Senator Rex Patrick
Senator for South Australia