Key issues
2.1
This chapter considers the views of stakeholders regarding the provisions of the bill. The key issues raised throughout the inquiry in relation to the bill, which are discussed in this chapter, included:
the necessity of the bill;
interpretive and administrative challenges for the Australian Taxation Office (ATO);
its incongruity with the objects of the Public Governance, Performance and Accountability Act 2013 (PGPA Act); and
independent oversight of the bill’s compliance requirements.
The necessity of the bill
2.2
While a number of submissions supported the bill, others suggested that the proposed legislative changes were unnecessary, arguing that substantial tax transparency measures related to procurement already existed and that the requirements introduced by the bill would place a significant and unjustified regulatory burden on the ATO, accountable authorities, suppliers and grant applicants. The most significant new tax transparency measures pertaining to Black Economy reporting have only relatively recently come into effect, but have already proven to provide an efficient method for scrutinising the tax integrity of firms that are competing in public procurement processes.
2.3
In offering support for the bill, independent journalist Michael West was of the view that the bill 'takes a significant step towards combating the "asset stripping" of Australian profit by multinational corporations'. To underscore this point, this submitter referred to his investigative journalism which had 'uncovered multiple cases of tax‑payer subsidised industries where profits are shipped overseas through tax avoidance structures'.
2.4
At the committee’s public hearing in Canberra on 5 August 2020, Mr Michael West further explained that the 'greater disclosure and greater transparency' measures set out in the bill would 'enforce better behaviour by the contractors themselves'.
2.5
Other submitters also referred to examples of 'extensive tax haven usage' in their submissions to the inquiry. Publish What You Pay Australia (PWYP Australia) referred to 'Australian extractives companies operating around the world' which 'routinely face allegations of corruption and tax avoidance', specifically pointing to its research that found 'at least 7 ASX mining companies operating in known tax havens'.
2.6
Mr Jason Ward, Principal Analyst, Centre for International Corporate Tax Accountability and Research (CICTAR) pointed out that:
[m]ultinational tax avoidance also creates a major competitive disadvantage for domestic businesses and those that are responsibly paying taxes they owe based on genuine economic activity.
2.7
CICTAR also highlighted the need to maximise 'corporate income tax revenue to help fund our public health system, keep our community safe, and pay for an equitable and rapid economic recovery'.
2.8
Mr Ward told the committee that CICTAR supported the measures proposed in the bill, and argued that for multimillion-dollar contracts which are in place for multiple years, that:
… the entity applying for that contract should be able to produce some basic information which is already has about where it operates and what it does. In my case studies of these companies, the disclosure level of some of these incredibly large multinationals is very limited. They have hundreds, if not thousands, of subsidiaries around the world and they disclose a handful of them because that's all they are required to do under both US and Australian reporting standards for publicly listed companies. So, as I've said before, if a company can't identify where it does business, then it's got some management issues that it should be dealing with …
2.9
Countering these views, the ATO submitted that:
Large corporate groups have … been shown to have high levels of tax compliance in Australian which has been further bolstered by the work of the Tax Avoidance Taskforce. Tax transparency has also increased in recent years with a number of initiatives increasing transparency of multinationals' global operations to both the public and the Commissioner.
2.10
The ATO also made the observation that:
… there are often legitimate reasons for entities to have a presence in a 'tax haven', such as the need to ensure tax neutral pooling of investments involving multiple investors from different countries. The mere existence of a 'tax haven' in a business structure does not automatically suggest tax non-compliance or avoidance.
2.11
The ATO also provided information about the new process to require tenderers for procurements valued over $4 million 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. This involves a higher standard of reassurance, than any requirement for suppliers themselves to produce information.
Increased regulatory burden
2.12
A number of submitters took the view that the bill would duplicate the provision of existing information to relevant authorities and would increase both regulatory and administrative burdens.
2.13
For example, the CPA noted that many large suppliers to government are public companies and therefore already publicly disclose their financial information. The CPA argued that:
As a result, the information sought to be legislated by the Bill is often already available to accountable authorities and the ATO is enabled through its information-gathering powers, including tax information exchange agreements with countries such as the Cayman Islands and Bermuda, and tax laws to ensure that the correct amount of tax is paid.
2.14
Submissions from the ATO and the Department of Finance (the department) also questioned the necessity of the bill in light of the existing measures in place to facilitate accountability and transparency in Commonwealth procurement. The ATO submitted that:
[A]s a result of the recent introduction of a requirement of a Statement of Tax Record for large procurement contracts we observe high levels of engagement in the tax system by suppliers. Between 23 May and 31 December 2019, the ATO issued over 4,100 Statement of Tax Records demonstrating compliance with registration, lodgement and payment criteria.
2.15
Mr Jeremy Hirschhorn, Second Commissioner, Client Engagement with the ATO, also made the point that there were multiple layers to the issue of transparency in the tax system. Mr Hirschhorn noted that it was:
… very important to distinguish between taxpayer transparency to the ATO, to the public and to a procurement decision-maker; they're different things. In terms of taxpayer transparency to the ATO, the ATO has more information than ever before, including through measures like country-by-country reporting and the reportable tax position schedule. In terms of taxpayer transparency to the public, in Australia there are similarly more measures than ever before, including extensions to the general purpose financial statement regime, the corporate tax transparency publication and the voluntary Tax Transparency Code. In terms of transparency to procurers, there is now the statement of tax record to bolster supply of declarations, which ensures that suppliers have registered for Australian tax obligations and are lodging and paying their tax.
2.16
In addition to the requirement of a Statement of Tax Record, the Department of Finance referred to existing Commonwealth Procurement Rules which require officials who make procurement decisions to ensure that they do not award contracts to suppliers who engage in practices that may be dishonest or unethical. Procurement rules also require that officials report contracts and amendments on AusTender within 42 days of the entity entering into or amending a contract.
2.17
The issue of increased regulatory burden on Commonwealth accountable authorities was highlighted by both the CPA and the department. For example, the department explained the burden that would arise under the bill as:
… requiring entities to assess the specific technical compliance of companies and associated entities with domestic and international tax law. This would require procuring entities to maintain specialist knowledge of domestic and international taxation regimes, including through the engagement of additional services.
2.18
Section 49C of the bill requires that suppliers provide tax‑transparency information to accountable authorities who undertake procurement. It is a very irregular arrangement to require an organisation to disclose aspects of its tax affairs to agencies that do not have any expertise in tax matters. The CPA, the department and the ATO asserted that the bill would place a disproportionate burden on small and medium enterprises (SMEs), 'noting that many larger and publicly listed suppliers were already required to publicly report relevant tax information'.
2.19
Even more unusual are the requirements in sections 49D and 49H (relating to procurement and grants respectively), that oblige officials, in agencies that have no expertise in tax matters, to form a judgment about whether a potential supplier is complying with taxation laws. This obligation on officials, covering agencies of all sizes, would require judgments to be made not only about compliance with Australian taxation law, but also compliance with the foreign taxation laws of all other countries around the world.
2.20
Although both sections require procurement officials to “consult” with the ATO, the provisions clearly place responsibility for these judgements with the heads of the agencies that are undertaking procurement processes. The sections do not suggest that an agency can delegate the decision outside their agency. At face value these decisions would appear to fall on procurement officials.
2.21
The Department of Finance remarked that in addition to the burden on SMEs, the bill would:
... delay relevant procurements due to bottlenecks and legislative challenge and increase costs to Government and business through the likely engagement of additional professional services. Given the existing transparency and accountability measures…it is unclear that the additional benefit would outweigh the potential costs and risks.
2.22
The CPA concluded that the bill:
… does not appear to enhance the information available to accountable authorities or the public, nor does the required information necessarily improve the decision-making process or government procurement. As such, it may not achieve the Bill's aims but instead burden accountable authorities, decision makers and the ATO for minimal to no public benefit.
2.23
Rather than introducing legislation, the CPA suggested alternative changes to achieve a similar effect to the objectives of the bill while avoiding unnecessary regulatory burden. These changes included:
the development of a procurement connected policy that considers global corporate and tax structures without the need for new legislation, similar to the Black Economy Procurement Connected Policy; and
funding the ATO to specifically review the tax compliance of suppliers to government, both in terms of the specific tax structures associated with the contract or grant itself as well as the broader group.
2.24
The CPA went on to suggest that if the bill was to proceed:
… consideration should be given to a more centralised approach to tax haven disclosures given the complexities of multinational taxation and the challenges in assessing tax compliance.
2.25
Further, the CPA argued that 'there should be more detail provided on the prescription of countries, or parts of a country, as a tax haven'. The CPA deemed that further consultation should be undertaken to co-design a 'targeted and appropriate tax transparency process for possible inclusion into government procurement processes'.
Grants
2.26
In 2018–19, the Commonwealth Government awarded over 30 000 grants, as defined by the Commonwealth Grants Rules and Guidelines 2017. Some grants are awarded for relatively small amounts and the diverse range of recipients can include community organisations and other non-profit organisations. Some grant recipient organisations operate on a mutuality basis, and therefore may never be in a position of having taxation obligations.
2.27
The Department of Finance noted that the bill contained ‘no thresholds or limits to the disclosure or consideration requirements of tax transparency information'. For example, the department noted that:
there were no apparent limits to the information sought under the bill by 'grant applicants' or their associates, such as limiting the 'tax‑transparency information' relevant to that grant application or by value of the grant; and
the accountable authority must consult with the Commissioner of Taxation (section 49H(3)(b)) in considering any grant, regardless of merit, value, number of grants or the information provided in reporting the domicile of the applicant or associates.
2.28
Noting these issues, the department argued that the bill would capture any individual or entity seeking to receive a Commonwealth Government grant, and it would therefore 'impose additional administrative burdens on applicants typically individuals and community organisations, their associates, accountable authorities and the Commissioner of Taxation'.
2.29
Referring to those portions of the bill concerning grants, the department stated that they 'appear to extend the scope of the PGPA Act by imposing requirements on applicants in receipt of financial assistance under other legislative frameworks such as the Australian Education Act 2013 and the Local Government (Financial Assistance) Act 1995.
2.30
The department also made the point that the accountability authority is not always the decision-maker in grant applications and that the range of approvers of grants include Ministers, Ministerial panels and boards.
Interpretive and administrative challenges for the ATO and accountable authorities
2.31
In its submission, the ATO argued that the bill raised significant challenges for the ATO, particularly around interpreting and administrating the requirements in relation to 'tax havens', 'domiciled' and 'complied or complying with any applicable laws in Australia or elsewhere that relate to tax'.
2.32
At the committee’s public hearing, the ATO identified several other administrative challenges, and noted that:
it is not always possible to identify and resolve issues in a procurement process due to the short lifespan of a procurement timetable;
the bill does not specify the consequences for a decision-maker (such as the ATO) if they were to incorrectly identify an issue, which may distort the procurement process;
the procurement regime should not discourage companies 'from disclosing and resolving issues';
the ATO does not have the information or expertise to assess overseas tax compliance;
in terms of resourcing, 'vetting all government suppliers would be highly resource consumptive and potentially skew resources from other higher priority and more important matters' (namely draining resources from compliance exercises that might involve the collection of revenue under Australian taxation law); and
the ATO already exercises 'significant powers to address inappropriate tax behaviours … subject to court oversight', and therefore to empower 'the ATO or any other decision-maker to veto a procurement … based on opinion without judicial oversight' would be a 'significant extension of those powers'.
Definition of 'tax haven' and 'domiciled'
2.33
There is no single definition of a 'tax haven'. In a research paper by the European Parliament, it was stated that:
Broadly speaking, 'tax havens' provide taxpayers, both legal and natural persons, with opportunities for tax avoidance, while their secrecy and opacity serves to hide the origin of the proceeds of illegal and criminal activities.
2.34
However, the ATO noted that 'no one concept perfectly captures all the issues associated with tax havens' and that international tax forums:
use different concepts to describe jurisdictions which present issues such as secrecy, unwillingness to cooperate with other jurisdictions in exchanging information, as well as harmful tax practices.
2.35
The ATO also pointed out that the mere existence of a 'tax haven' in a business structure does not automatically suggest tax non-compliance or avoidance. The ATO observed that there are often legitimate reasons for entities to have a presence in a 'tax haven', such as the need to ensure tax neutral pooling of investments involving multiple investors from different countries.
2.36
The ATO submitted that:
The Commissioner would require detailed expertise in a jurisdiction's tax settings and rules in order to provide advice to the Minister on potentially prescribing a jurisdiction as a 'tax haven'. The ATO would need to invest to develop the requisite level of expertise. We also expect that this work would require a material resource commitment (depending on the number of jurisdictions to be considered).
2.37
The ATO and the department also expressed concerns that the vague term 'domiciled' in connection with 'tax haven' was not defined in the bill. The ATO reiterated the interpretive challenge it would be faced with should the bill be enacted and noted that the term may not capture all intended parties.
Compliance with tax laws
2.38
The ATO and the CPA raised concerns that the bill does not define 'have complied, or are complying, with any applicable laws in Australia or elsewhere that relate to tax'. The term ‘elsewhere’ appears to refer to almost all other countries in the world, namely those that impose taxation. The ATO went on to state that:
… it is unclear whether the ATO needs to provide positive assurance that a supplier is compliant (requiring significant investigation) or whether there is some lesser standard.
2.39
The ATO affirmed that the Commissioner would not be able to provide definitive advice or positive assurance that a party and/or their associates had 'complied, or are complying with any applicable laws in Australia or elsewhere that relate to tax', for the following reasons:
depending on available information, the ATO may be unable to trace beneficial ownership and ascertain whether a supplier has a connection with a tax haven;
compliance is not necessarily a binary concept, particularly in the international tax sphere, where additional complexities arise;
information obtained under Australia's tax treaties and tax information exchange agreements cannot be used for non-tax related purposes, such as procurement;
real time data on foreign tax compliance was unlikely to be available, and the ATO would therefore not be able to provide accountable authorities with meaningful assistance in considering a supplier's compliance with taxation laws in overseas jurisdictions; and
from a domestic perspective, the ATO's expertise and ability to assess compliance is specific to taxes administered by the Commissioner, which exclude taxes of Australian states, territories or local government.
2.40
Because of these reasons, the ATO suggested that any decision it made on procurement and grants, based on the tax laws of other jurisdictions, 'could adversely affect the business of entities prior to them having the opportunity to have a tax dispute decided by the court system'.
2.41
Similarly, the CPA described the potential administrative challenges for accountable authorities in assessing tax compliance, taking into account the resource limitations that the ATO would encounter. The CPA was of the view that:
Given the tax expertise required to assess the level of compliance and tax governance risk associated with cross-border taxation and global corporate structures, there is a risk that the accountable authorities may develop inconsistent and potentially subjective approaches to assessing the supplier and its associates' compliance with tax laws both in Australia and elsewhere.
The incorrect presumption that the existence of tax haven within a supplier's group structure is evidence of tax evasion may introduce cognitive bias into accountable authority decision making, while the ATO may not be able to provide full, detailed assessments due to privacy obligations or resourcing constraints.
Incongruity with the purpose and scope of the PGPA Act
2.42
The Department of Finance considered that the bill's proposed amendments to the PGPA Act fell outside the objectives and purpose of that Act. The objects of the PGPA Act were cited as follows:
(a) to establish a coherent system of governance and accountability across Commonwealth entities; and
(b) to establish a performance framework across Commonwealth entities; and
(c) to require the Commonwealth and Commonwealth entities:
(i) to meet high standards of governance, performance and accountability; and
(ii) to provide meaningful information to the Parliament and the public; and
(iii) to use and manage public resources properly; and
(iv) to work cooperatively with others to achieve common objectives, where practicable; and
(d) to require Commonwealth companies to meet high standards of governance, performance and accountability.
2.43
The department highlighted that the PGPA Act was concerned with general governance and financial management issues, while the bill was concerned with specific instances and subjects not covered by the PGPA Act, namely the taking into account the tax compliance of a supplier or grant applicant domiciled in tax havens. The department was of the view that 'such obligations are well beyond the scope and objectives of the PGPA Act'.
2.44
The department further noted that the bill 'seeks to have the Minister for Finance, as the Minister responsible for the administration of the PGPA Act, prescribe certain countries as tax havens' and made the point that the Minister for Finance is not responsible for taxation matters. Rather, these responsibilities fall within the responsibility of the Treasurer.
Independent oversight
2.45
While the CPA argued against further regulatory burden in its submission, Professor Louis de Koker—who supported the bill in principle—suggested that 'the introduction of additional disclosure rules [proposed by the bill] will have limited impact if they are not accompanied by improved due diligence and especially verification requirements'.
2.46
Professor de Koker directed the committee to his 2015 research paper which found that 'limited supplier integrity due diligence exposed the government to money laundering and terrorist financing risks'. Although the Government has since introduced various legislative and policy reforms to counter such risks, Professor de Koker maintained that 'more remains to be done'. Professor de Koker also considered that 'independent checks' by procurement officials should be performed to guard against 'unscrupulous suppliers' who currently self‑disclose and self‑certify.
2.47
Conversely, in its submission the CPSU did not advocate for independent checks of suppliers, but suggested that the bill could go further to require:
… any company bidding for a Commonwealth contract to disclose whether it has been convicted of tax avoidance in a foreign jursidction [sic] in the last five years or issued with compliance notices or enforceable undertakings in relation to its tax arrangements by a foreign tax authority.
2.48
The department drew attention to existing oversight procedures, noting the importance of the Australian Government Solicitor (AGS) in carrying out due diligence in the procurement process, and the obligations of decision‑makers in relation to procurements.
2.49
Dr Stein Helgeby, Deputy Secretary, Governance and Resource Management, Department of Finance explained the due diligence process carried out by the AGS and other decision‑makers in the procurements and grants process:
… in each case, the accountable authority—or the decision-maker—is the one who has to satisfy themselves about the legal status of the decision they’re making. In those sorts of circumstances, sometimes they go to in‑house councils, sometimes they go to the AGS and potentially they go to others as well, but the fundamental test is for the decision-maker to satisfy themselves of the appropriateness of the decision they’re making.
Committee view
2.50
The Government has shown its commitment to tackling the black economy, and to ensuring thorough and transparent procurement and grant processes. For example, the suite of measures in the 2018–19 Budget implemented a whole‑of‑government blueprint for tackling the black economy, including the Procurement Policy which has been in operation since 1 July 2019.
2.51
The policy prevents high-value government contracts from being awarded to businesses who do not comply with their key tax obligations. The ATO certifies the good tax citizenship of relevant suppliers based on available information. In doing this the ATO can have regard to information on a variety of international tax avoidance behaviours, not just behaviour that relates to tax havens. Between 23 May and 31 December 2019, the ATO issued over 4,100 Statement of Tax Records for potential suppliers, demonstrating that suppliers who seek Australian Government work have a high level of compliance with key tax obligations such as lodgement of returns and payment of tax assessments.
2.52
The committee considers that the existing successful Black Economy initiative more directly and carefully addresses many of the concerns that the bill seeks to address. This procurement vetting initiative has been operating for only slightly over a year, so it would be premature to duplicate this measure at such an early time. The committee also notes that the Government intends to continue to develop and consult on other recommendations in the final report of the Taskforce. The committee offers its support to the Government as it seeks ways to combat multinational tax avoidance.
2.53
The committee holds a number of serious concerns about the impracticality of the bill and its very poor suitability in several aspects.
2.54
It would be extraordinary regulatory burden to require procurement officials in small and medium sized agencies to form judgments about whether large and sophisticated suppliers had adequately complied with the taxation laws of other countries. Small agencies may occasionally need to source goods from multinational suppliers, such as technology companies and manufacturing companies. The proposals in this bill amount to such a burden on procurement officials, that they are likely to be deterred from considering or selecting suppliers who have international operations, even where those companies offer the most cost-effective goods and services. Even if this deterrence was an intentional effect of the bill, it is far from certain that Australian companies would benefit. The most successful Australian companies tend to be those who export their expertise and have international operations. Such Australian companies could be exposed to serious harm by the proposals in this bill, because their tax affairs would be difficult to assess, and they could therefore be vulnerable to losing out in a short-listing exercise.
2.55
As noted by several submitters, this bill would increase the regulatory burden on all involved in the procurements and grants process. In particular, the point was made that the bill's provisions, if enacted, would disproportionately impact small and medium‑sized enterprises.
2.56
The ATO made it clear that it lacked the resources to advise other agencies about whether suppliers had satisfactorily complied with the laws of other countries, meaning that inevitably the bill would oblige procurement officials in relevant agencies to make decisions with little outside support. The ATO also noted that if any officials made erroneous judgments about the tax behaviour of a supplier, then they could find themselves exposed to legal consequences where those suppliers are unsuccessful.
2.57
A number of issues about the bill were raised regarding its interpretation, administration and necessity. For example, the lack of clarity around some of the key terms in the bill was pointed to by stakeholders as presenting profound interpretative (and therefore legal) challenges.
2.58
The need to consider and assess the level of compliance with tax laws in foreign jurisdictions, and well as determining what countries may be a 'tax haven', was also highlighted by the ATO as a matter of significant concern, as it did not possess the expertise or information to make such assessments. The vague and disjointed tests about whether a supplier or their associates are domiciled in a tax haven was another area of concern. The bill relies, at its core, on concepts that the independent professional experts in the ATO struggled to make sense of. The ATO advises that the term ‘tax haven’ has fallen out of use, as a meaningful concept, while tax transparency cooperation has progressed considerably in recent years. The bill seeks to use yesterday’s language to address today’s problems.
2.59
Similarly, the department recognised that the bill would require procuring entities to maintain knowledge of both domestic and international taxation regimes, a substantial and resource-intensive regulatory burden. Taxation expertise requires years of study, as taxation laws are voluminous and highly complex.
2.60
Mr Hirschhorn observed that:
… when I read clause 49D and put myself in the shoes of a procurement decision-maker I don't know how I could get information on those points, other than relying on a declaration from the party who is seeking the contract. To be blunt, I don't know where you would start in trying to ascertain that if you were sitting in the procurement division of a government department, and the tax office would be no help. The parliament has given us the very important job of ensuring that large companies are held to account in relation to their Australian tax obligations, but it's a much bigger job if you're asking us to be responsible for a company's global tax obligations.
2.61
The committee considers it is preferable that procurement officials focus on being well versed in procurement rules and guidelines, while relying on the ATO to independently certify whether a major supplier has tax compliance problems (as happens now under the recently commenced Black Economy measure). The bill is impractical to the point of being unworkable in suggesting that taxation experts be recruited across almost 200 agencies, let alone that these experts be capable of assessing compliance with the taxation laws of every country in the world. The committee has given the bill a fair hearing, but the evidence presented did not assuage the concern that the bill was based on an impossibly extravagant vision.
2.62
The bill does not make allowance for flexibility where a procurement must be undertaken quickly, where a tax compliance assessment is not possible—for instance, the purchase of medicines during a global health pandemic.
2.63
Even where there is no urgency factor, the bill does not contemplate the delay that a tax compliance check will add to the process for a supplier with an international presence. The bill would require new inquiries to be made into compliance with the laws of other countries, making it insufficient to rely on past work done by the ATO.
2.64
Overall, the committee shares the view of the department that with the existing and adequate transparency and accountability measures in place for Commonwealth procurement, it is unclear that the bill could credibly be made to work, or, even if it could, would serve a benefit that would outweigh its evident costs and manifold risks.
2.65
Given the fundamental problems with the bill, it is difficult to conceive a way in which it could be made workable through amendment. For the reasons detailed above, the committee does not agree with the proposed changes to the PGPA Act and the Tax Administration Act and recommends that the Senate does not pass the bill.
2.66
The committee recommends that the Senate does not pass the Public Governance, Performance and Accountability Amendment (Tax Transparency in Procurement and Grants) Bill 2019.
Senator James Paterson
Chair