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Finance and Public Administration Legislation Committee—Senate Standing—Public Governance, Performance and Accountability Amendment (Tax Transparency in Procurement and Grants) Bill 2019—Report, dated September 2020


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September 2020

The Senate

Finance and Public Administration Legislation Committee

Public Governance, Performance and Accountability Amendment (Tax Transparency in Procurement and Grants) Bill 2019

© Commonwealth of Australia

ISBN 978-1-76093-106-3

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia License.

The details of this licence are available on the Creative Commons website: http://creativecommons.org/licenses/by-nc-nd/3.0/au/.

Printed by the Senate Printing Unit, Parliament House, Canberra

iii

Members

Chair Senator James Paterson LP, VIC

Deputy Chair Senator Tim Ayres (From 06.02.2020) ALP, NSW

Members Senator Kimberley Kitching ALP, VIC

Senator Matt O'Sullivan LP, WA

Senator Malcolm Roberts PHON, QLD

Senator Paul Scarr LP, QLD

Former Member Senator Jenny McAllister (Deputy Chair until 06.02.2020) ALP, NSW

Participating Members Senator Rex Patrick CA, SA

Senate Finance and Public Administration Committee Secretariat: Sarah Redden, Acting Secretary (From 10.08.2020) Ann Palmer, Secretary Tas Larnach, Principal Research Officer Nicola Knackstredt, Senior Research Officer Caroline Wang, Senior Research Officer Kate Morris, Research Officer Jo-Anne Holmes, Administrative Officer Michaela Le Cheile, Administrative Officer

The Senate PO Box 6100 Parliament House Canberra ACT 2600 Ph: 02 6277 3846 Fax: 02 6277 5809 E-mail: fpa.sen@aph.gov.au Internet: www.aph.gov.au/senate_fpa

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Table of Contents

Members ............................................................................................................................................. iii

Recommendations ............................................................................................................................ vii

Chapter 1—Introduction and background ..................................................................................... 1

Referral ................................................................................................................................................. 1

Purpose of the bill ................................................................................................................................ 1

Conduct of the inquiry ........................................................................................................................ 2

Provisions of the bill ............................................................................................................................ 2

Background to the bill ......................................................................................................................... 3

Legislation and rules governing Commonwealth procurement and grants ................... 3

Multinational Tax Avoidance legislation .............................................................................. 7

The Black Economy Taskforce ................................................................................................ 7

Chapter 2—Key Issues ....................................................................................................................... 9

Key issues .............................................................................................................................................. 9

The necessity of the bill ............................................................................................................ 9

Interpretive and administrative challenges for the ATO and accountable authorities 15

Incongruity with the purpose and scope of the PGPA Act .............................................. 18

Independent oversight ........................................................................................................... 19

Committee view ................................................................................................................................. 20

Additional comments - Australian Labor Party .......................................................................... 25

Dissenting report - Senator Rex Patrick........................................................................................ 27

Appendix 1—Submissions .............................................................................................................. 31

Appendix 2—Public Hearings ........................................................................................................ 33

vii

Recommendations

Recommendation 1

2.65 The committee recommends that the Senate does not pass the Public Governance, Performance and Accountability Amendment (Tax Transparency in Procurement and Grants) Bill 2019.

1

Chapter 1

Introduction and background

Referral 1.1 On 13 November 2019, the Public Governance, Performance and Accountability Amendment (Tax Transparency in Procurement and Grants) Bill 2019 (the bill) was introduced to the Senate by Senator Rex Patrick.1

1.2 On 14 November 2019, pursuant to a Senate Selection of Bills Committee Report, the bill was referred to the Senate Finance and Public Administration Legislation Committee (the committee) for inquiry and report by 19 March 2020.2

1.3 On 26 February 2020, the Senate granted an extension of time for reporting until 21 April 2020.3 On 23 March 2020, the Senate extended the committee's reporting date to 4 September 2020.4

Purpose of the bill 1.4 The bill seeks to respond to the Government's expressed 'desire to combat multinational tax avoidance'.5 This would be achieved by reforming the Commonwealth's procurement rules in order to 'place greater knowledge and

transparency arrangements on government agencies entering into contracts with companies that are, or have related entities, domiciled in recognised tax havens'.6 Similar tax-transparency measures would also be introduced to apply to 'arrangements for the provision of grants by Commonwealth entities'.7

1.5 To achieve this stated purpose, the bill would amend the Public Governance, Performance and Accountability Act 2013 (PGPA Act) and the Taxation Administration Act 1953 (Tax Administration Act). The proposed amendments would require the responsible Minister, in consultation with the Commissioner

1 Journals of the Senate, No. 26, 13 November 2019, p. 809.

2 Journals of the Senate, No. 27, 14 November 2019, p. 845.

3 Journals of the Senate, No. 46, 27 February 2020, p. 1409.

4 Journals of the Senate, No. 48, 8 April 2020, p. 1469.

5 Public Governance, Performance and Accountability Amendment (Tax Transparency in

Procurement and Grants) Bill 2019, Explanatory Memorandum (EM), p. 1.

6 Public Governance, Performance and Accountability Amendment (Tax Transparency in

Procurement and Grants) Bill 2019, EM, p. 1.

7 Public Governance, Performance and Accountability Amendment (Tax Transparency in

Procurement and Grants) Bill 2019, EM, p. 1.

2

of Taxation, to 'prescribe foreign countries or parts thereof as tax havens'.8 The Minister would also be required to:

… publish a notice setting out the country, or the part of the country, the Minister proposes to prescribe; and invite interested parties to make submissions about the proposed prescription.9

1.6 Three 'key requirements' would also be established by the bill to apply to both procurement and grants, namely, 'a disclosure requirement, a consideration requirement and a publication requirement'.10

1.7 The Explanatory Memorandum (EM) states that 'Australian taxpayers have a right to know if any significant amount of taxpayer money is being given to entities with tax haven links', and asserts that the proposed amendments in the bill 'will achieve that objective'.11 The EM sets out the purported benefits of these proposed changes, being that:

… the information that flows into the public domain will inform policy makers and public debate about further measures that may be required to strengthen Australia's efforts to reduce multinational taxation avoidance.12

Conduct of the inquiry 1.8 Details of the inquiry, including links to the bill and associated documents were made available on the committee's website at:

www.aph.gov.au/senate_fpa.

1.9 The committee directly contacted a number of relevant organisations and individuals to notify them of the inquiry and invite submissions. The committee received ten submissions, which are listed at Appendix 1.

Provisions of the bill 1.10 As noted above, the bill—which is comprised of one Schedule—would amend both the PGPA Act and the Tax Administration Act.13

8 Public Governance, Performance and Accountability Amendment (Tax Transparency in

Procurement and Grants) Bill 2019, EM, p. 1.

9 In carrying out these obligations, 'the Minister must have regard to advice and submissions

received before deciding to prescribe a tax haven'—see, Public Governance, Performance and Accountability Amendment (Tax Transparency in Procurement and Grants) Bill 2019, EM, p. 1.

10 Public Governance, Performance and Accountability Amendment (Tax Transparency in

Procurement and Grants) Bill 2019, EM, p. 1.

11 Public Governance, Performance and Accountability Amendment (Tax Transparency in

Procurement and Grants) Bill 2019, EM, p. 2.

12 Public Governance, Performance and Accountability Amendment (Tax Transparency in

Procurement and Grants) Bill 2019, EM, p. 2.

13 Part 1 of Schedule 1 amends the Public Governance, Performance and Accountability Act 2013, and

Part 2 of Schedule 1 the Taxation Administration Act 1953.

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1.11 Item 1 of Part 1 introduces a new section to the 'Guide to this Act' in the PGPA Act, which outlines the nature of the proposed changes that would be made by the bill—namely, that the Act would now also place '…requirements on the accountable authority of the entity for relevant procurements and grants'.14 The Bill creates a new concept of ‘Commonwealth Procurement Rule entities’ (CPR entities) which it defines in subsection 49B(2) of the bill to include non-corporate Commonwealth entities and corporate Commonwealth entities that are prescribed under rules.

1.12 Section 49A empowers the Minister to prescribe a country, or part of a country, as a tax haven.15 As noted above, this power is subject to certain requirements, including that the Minister must consult with the Commissioner of Taxation about the proposed prescription.16

1.13 Sections 49B to 49E of Subdivision B apply the new tax transparency regime proposed by the bill to 'CPR entities',17 by introducing into the PGPA Act new thresholds for CPR entities and associated procurement requirements.

1.14 Sections 49F to 49J of Subdivision C apply the new tax transparency regime proposed by the bill to grants by, or on behalf of, the Commonwealth.18

1.15 Part 2 of the bill introduces proposed amendments to the Tax Administration Act that are consequential to those proposed amendments to the PGPA Act.

Background to the bill

Legislation and rules governing Commonwealth procurement and grants 1.16 The PGPA Act is administered by the Department of Finance (the department) and is described as 'the cornerstone of the Commonwealth Resource Management Framework'.19 It establishes general duties and obligations for all

officials of Commonwealth entities and companies in relation to the use and

14 Public Governance, Performance and Accountability Amendment (Tax Transparency in

Procurement and Grants) Bill 2019, it. 1.

15 As defined in proposed ss. 49A(1)—'A tax haven is a country, or a part of a country, which is

prescribed by the rules as a tax haven'.

16 The other requirements on the Minister are listed at proposed ss. 49A(2).

17 Proposed ss. 49B(2), defines a CPR as '(a) a non-corporate Commonwealth entity; or (b) a corporate

Commonwealth entity prescribed by the rules'.

18 As defined at proposed ss. 49F(1), namely 'a provision of financial assistance by, or on behalf of the

Commonwealth: (a) under which relevant money or other CRF money is to be paid to a grantee; and (b) which is intended to help achieve the priorities and objectives 24 of the Australian Government'.

19 Department of Finance, Introduction to the PGPA Act for officials, available at:

https://www.finance.gov.au/government/managing-commonwealth-resources/managing-risk-internal-accountability/duties/duties/introduction-pgpa-act-officials (accessed 14 February 2020).

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management of public resources. It also establishes rules for the broader governance, performance and accountability for the Commonwealth public sector.20

1.17 The Commonwealth Procurement Rules (CPRs), issued by the Minister for Finance pursuant to subsection 105B(1) of the PGPA Act, govern the procurement of goods and services on behalf of the Commonwealth. The CPRs are described by the Minister for Finance as 'the keystone of the Government's procurement policy framework'.21 The core objectives of the CPRs is to ensure relevant entities achieve value for money in the conduct of procurement activity.22 These rules are broadly principle-based, and allow the flexibility for officials to undertake procurements using an appropriate degree of complexity or simplicity as appropriate to the goods or services that they are acquiring.

1.18 In addition to addressing the way in which procurement processes are to be conducted, the CPRs include requirements for relevant entities to publish on AusTender information about planned procurements, open tenders, and notices reporting key details of contracts that have been awarded.23

1.18 The CPRs require entities undertaking procurement to ensure they do not benefit from supplier practices that may be dishonest or unethical.24 This is a general statement of principle, so the CPRs do not itemise all the areas of law that this principle may apply to. Accordingly, the CPRs do not make reference to tax havens define what ethical or non-ethical tax behaviour may look like. The principle in the CPRs therefore relies upon Australian taxation laws to define what appropriate tax behaviour looks like.

1.19 Australia’s international trade agreements contain provisions on government procurement that include commitments to non-discrimination against potential suppliers due to their size, degree of foreign affiliation or ownership, location, or the origin of their goods or services. Reciprocally, our free trade partners undertake to ensure Australian suppliers are not disadvantaged when tendering for government procurement in their countries. Australia’s membership of the WTO Government Procurement Agreement gives Australian businesses legally binding access to the government procurement

20 Department of Finance, Introduction to the PGPA Act for officials, 24 January 2020.

21 Department of Finance, Commonwealth Procurement Rules, 20 April 2019, p. 3.

22 Department of Finance, Foreward to the Commonwealth Procurement Rules, 7 November 2019,

www.finance.gov.au/government/procurement/commonwealth-procurement-rules/foreword (accessed 16 March 2020).

23 Department of Finance, Commonwealth Procurement Rules - Accountability and Transparency,

12 November 2019, www.finance.gov.au/government/procurement/commonwealth-procurement-rules/accountability-transparency (accessed 16 March 2020).

24 Commonwealth Procurement Rules, 20 April 2019, para. 6.7.

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markets of the 47 current GPA members, that are collectively worth around A$2.5 trillion each year.25

1.20 Key changes were made to the Commonwealth Procurement Rules in 2017 to require Commonwealth officials to consider the economic benefit to Australia offered by alternate tenderers on contracts with a material value (those worth over $4 million, or for construction contracts over $7.5m). These changes went as far as Australia legally could, to ensure that the economic benefits offered by alternate suppliers is recognised in procurement processes, while not breaching Australia’s trade obligations that give local companies access to overseas markets worth billions of dollars. Guidelines are published on the Department of Finance website to guide procurement officials about how to assess the domestic economic benefit offered by a supplier (the most recent update is from August 2020).26

1.21 In December 2017, the Australian National Audit Office (ANAO) published an Information Report on Commonwealth procurement practices. The report was 'neither an audit nor an assurance review', and presented no conclusions.27 Rather, the report was aimed at providing insight and information on the following areas:

 the volume and value of Government procurement contracts by entity, product/service categories, and other characteristics;  entities' procurement contract behaviour in regard to the timing of procurements during each financial year, their use of procurement

methods and confidentiality clauses, and amendments to contracts;  accuracy and timeliness of entities' procurement contract reporting; and  reporting on the number and value of procurement contracts undertaken with Small to Medium Enterprises (SMEs)'.28

1.22 According to the department, in the 2018-19 financial year, there were 78 150 contracts published on AusTender with a combined value of $64.5 billion.29 Of these contracts:

25 Department of Foreign Affair and Trade, Agreement on Government Procurement, available at:

https://www.dfat.gov.au/trade/organisations/wto/Pages/wto-agreement-on-government-procurement (accessed 31 August 2020).

26 Department of Finance, Consideration of Broader Economic Benefits in Procurement, available at:

https://www.finance.gov.au/sites/default/files/2020-08/consideration-of-broader-economic-benefits-in-procurement.pdf (accessed 31 August 2020).

27 Australian National Audit Office, Australian Government Procurement Contract Reporting, ANAO

Report No.19 2017-18, p. 6.

28 Australian National Audit Office, Australian Government Procurement Contract Reporting, ANAO

Report No.19 2017-18, p. 7.

29 Department of Finance, Statistics on Australian Government Procurement Contracts, available at:

www.finance.gov.au/government/procurement/statistics-australian-government-procurement-contracts- (accessed 18 February 2020).

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 94.1 per cent of contracts by volume (73 575) were below $1 million; and  340 high-value contracts (0.4 per cent by volume) represented 63.0 per cent of the total value of contracts awarded at $40.6 billion.30

1.23 Commonwealth Procurement Rules include a commitment to source at least 10 per cent by value of all procurements from Small and Medium Enterprises. On the latest data (for Financial Year 2018-19) SMEs are getting 25.9% by value, worth $16.7 billion and—importantly—this is up by $3.8 billion from the previous financial year. The Government has made an additional commitment to source at least 35 per cent of contracts valued up to $20 million from SMEs and, in 2018-19, 53% of these contracts were awarded to SMEs (valued at $10.01 billion and covering 41 261 contracts).31

1.24 The latest information report update released in March 2020 by the ANAO about Australian Government Procurement Contract Reporting outlined that:

Nearly two thirds of Australian Government entities are required to centrally report data on AusTender on contracts they have awarded with a value above prescribed reporting thresholds. There is no centralised reporting on the value of procurement activity undertaken by 34 percent of Australian Government entities as they are not covered by the CPRs. This includes some entities that are engaged in significant procurement activities.32

1.25 Similar to the way in which the CPRs establish the Commonwealth procurement framework, the Commonwealth Grants Rules and Guidelines 2017 (CGRGs) establish the Commonwealth grants policy framework, which applies to all non-corporate Commonwealth entities subject to the PGPA Act and prescribed corporate Commonwealth entities listed in section 30 of the Public Governance, Performance and Accountability Rule 2014.33

1.26 The bill does not propose to introduce any new terminology into the CGRGs, but instead introduces a new requirement for non-corporate Commonwealth entities to provide 'tax-transparency information'.

1.27 Each Commonwealth entity 'must report, on GrantConnect, information on individual grants no later than twenty-one calendar days after the grant

30 Department of Finance, Statistics on Australian Government Procurement Contracts, available at:

www.finance.gov.au/government/procurement/statistics-australian-government-procurement-contracts- (accessed 18 February 2020).

31 Department of Finance, Statistics on Australian Government Procurement Contracts, available at:

https://www.finance.gov.au/government/procurement/statistics-australian-government-procurement-contracts- (accessed 31 August 2020).

32 Australian National Audit Office, Australian Government Procurement Contract Reporting Update,

Report No. 27, 2019-20, p. 7.

33 The Commonwealth Grants Rules and Guidelines 2017 are issued by the Minister for Finance

under s. 105C of the Public Governance, Performance and Accountability Act 2013.

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agreement for the grant takes effect'.34 The GrantConnect site has been expanded in recent years and now contains information not only on grants that have been awarded, but also, importantly, on competitive grant processes that are open or pending.

Multinational Tax Avoidance legislation 1.28 The Multinational Anti-Avoidance Law (MAAL) came into effect in December 2015. It was established to ensure that multinational enterprises pay their fair share of tax on profits earned in Australia.35 It aims to counter the

erosion of Australia's tax base when multinationals use artificial and contrived arrangements to avoid the attribution of profits to a permanent establishment in Australia. 36 The MAAL applies to significant global entities37 including both Australian-headquartered entities (with or without foreign operations) and the local operations of foreign headquartered multinationals.

The Black Economy Taskforce 1.29 The Government has recently made changes to the Commonwealth's procurement practices following the final report of the Black Economy Taskforce (the Taskforce).

1.30 The Taskforce was established in December 2016 'to develop an innovative, forward-looking and genuinely whole-of-government strategy to combat the black economy'.38 Its establishment followed an initial investigation by the Board of Taxation, supported by the Treasury and the Australian Taxation Office (ATO).39

1.31 The Taskforce published an Interim Report in March 2017, in response to which the Government announced the adoption of three key measures in the 2017-18 Budget, namely:

 banning electronic sales suppression tools which enable businesses to "hide" transactions;

34 This requirement took effect from 31 December 2017—see: Department of Finance, Senate Order 16

Departmental and agency grants, available at:

https://www.finance.gov.au/publications/grants/senate-order-16-departmental-agency-grants (accessed 18 February 2020).

35 Australian Taxation Office, Combating multinational tax avoidance - a targeted anti-avoidance law,

10 August 2017 (accessed 5 August 2020).

36 Australian Taxation Office, A strong domestic tax regime, 12 December 2019 (accessed

5 August 2020).

37 A significant global entity is a standalone or accounting consolidated parent entity with annual

global income of A$1 billion or more.

38 Black Economy Taskforce, Final Report, October 2017, p. 1.

39 Black Economy Taskforce, Final Report, October 2017, p. 1.

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 tackling tax evasion in high risk industries through a requirement that businesses report payments to contractors in the courier and cleaning industries; and  extending ATO audit and compliance programs for a year to better target

black economy risks while the Taskforce finalised its findings.40

1.32 The Taskforce published its final report in October 2017. In response, the Government announced a ‘whole-of-government blueprint for tackling the black economy', which included 'a series of measures announced in the 2018-19 Budget' and further measures on which the Government will continue to develop and consult.41

1.33 One of these measures was the Black Economy Procurement Connected Policy (the Policy), which from 1 July 2019 requires businesses seeking to tender for Australian Government procurement contracts over $4 million (including GST) to provide a statement from the ATO showing they have a satisfactory tax record (STR). Similarly, any first-tier subcontractors with a subcontract for over $4 million (including GST) are required to hold an STR.42

1.34 This policy is intended to prevent high-value government contracts from being awarded to businesses who do not comply with their tax obligations. Between 23 May and 31 December 2019, the ATO issued over 4,100 Statement of Tax Records for potential suppliers, 43 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. There may also be a deterrence effect for companies who do not have a track record of compliant taxation behaviour, but that effect may not be easily estimated or measureable.

1.35 All non-corporate Commonwealth entities must comply with the Policy when approaching the market to establish new contracts, and to create Standing Offer (panel) arrangements over $4 million (including GST) as well as ensuring STRs remain valid and satisfactory during the contracting and contract management phases of the procurement.44

40 Commonwealth of Australia, Tackling the black economy: Government Response to the Black Economy

Taskforce Final Report, May 2018, p. 4.

41 The Treasury, Australian Government response to the Black Economy Taskforce Final Report, available

at: https://treasury.gov.au/publication/p2018-287474 (accessed 18 February 2020).

42

Department of Finance, Black Economy, www.finance.gov.au/government/procurement/clausebank /black-economy (accessed 18 February 2020).

43 ATO, Submission 5, p. 3.

44 Department of Finance, Black Economy.

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Chapter 2 Key Issues

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,1 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.2 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'.3 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'.4

1 See, for example, Ms Monica Mesch, Submission 1; Professor Louis de Koker, Submission 3; Centre

for International Corporate Tax Accountability and Research, Submission 8; Community and Public Sector Union, Submission 6; Michael West Media, Submission 4; Publish What You Pay Australia, Submission 9; Nook Studios, Submission 10.

2 See, for example, CPA Australia, Submission 2; Australian Taxation Office (ATO), Submission 5;

Department of Finance, Submission 7.

3 Michael West Media, Submission 4, p. 1.

4 Michael West Media, Submission 4, p. 1.

10

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'.5

2.5 Other submitters also referred to examples of 'extensive tax haven usage' in their submissions to the inquiry.6 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'.7

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.8

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'.9

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 …10

5 Mr Michael West, Founder, Michael West Media, Proof Committee Hansard, 5 August 2020, p. 2.

6 Centre for International Corporate Tax Accountability and Research, Submission 8, p. 1. See also,

Community and Public Sector Union, Submission 6, p. 1; Publish What You Pay Australia, Submission 9.

7 Publish What You Pay Australia, Submission 9, p. 2.

8 Mr Jason Ward, Principal Analyst, Centre for International Corporate Tax Accountability and

Research (CICTAR), Proof Committee Hansard, 5 August 2020, p. 7.

9 Mr Jason Ward, Principal Analyst, Centre for International Corporate Tax Accountability and

Research (CICTAR), Proof Committee Hansard, 5 August 2020, p. 7.

10 Mr Jason Ward, Principal Analyst, Centre for International Corporate Tax Accountability and

Research (CICTAR), Proof Committee Hansard, 5 August 2020, p. 9.

11

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.11

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.12

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 2.11 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.

2.12 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.13

2.13 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

11 Australian Taxation Office, Submission 5, p. 3. See also, Mr Jeremy Hirschhorn, Second

Commissioner, Client Engagement, Australian Taxation Office, Proof Committee Hansard, 5 August 2020, p. 12.

12 Australian Taxation Office, Submission 5, p. 3.

13 CPA Australia, Submission 2, pp. 1-2.

12

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.14

2.14 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.15

2.15 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.16

2.16 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.17

2.17 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

14 ATO, Submission 5, p. 3.

15 Mr Jeremy Hirschhorn, Second Commissioner, Client Engagement, Australian Taxation Office,

Proof Committee Hansard, 5 August 2020, p. 12.

16 Department of Finance, Submission 7, p. 5.

17 Department of Finance, Submission 7, p. 2.

13

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'.18

2.18 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.

2.19 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.

2.20 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.19

2.21 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.20

2.22 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:

18 Department of Finance, Submission 7, p. 3; CPA Australia, Submission 2, p. 4; ATO, Submission 5,

p. 5.

19 Department of Finance, Submission 7, p. 5.

20 CPA Australia, Submission 2, p. 2.

14

 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.21

2.23 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.22

2.24 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'.23 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'.24

Grants 2.25 In 2018-19, the Commonwealth Government awarded over 30 000 grants, as defined by the Commonwealth Grants Rules and Guidelines 2017.25 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.

2.26 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.26

21 CPA Australia, Submission 2, p. 2.

22 CPA Australia, Submission 2, p. 2.

23 CPA Australia, Submission 2, p. 2.

24 CPA Australia, Submission 2, p. 6.

25 Department of Finance, Submission 7, p. 6.

26 Department of Finance, Submission 7, p. 5.

15

2.27 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'.27

2.28 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 1995.28

2.29 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.29

Interpretive and administrative challenges for the ATO and accountable authorities 2.30 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'.30

2.31 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

27 Department of Finance, Submission 7, p. 5.

28 Department of Finance, Submission 7, p. 5.

29 Department of Finance, Submission 7, p. 7.

30 ATO, Submission 5, p. 3.

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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'.31

Definition of 'tax haven' and 'domiciled' 2.32 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.32

2.33 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.33

2.34 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.34

2.35 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).35

31 Mr Jeremy Hirschhorn, Second Commissioner, Client Engagement, ATO, Proof Committee Hansard,

5 August 2020, pp. 12-13.

32 European Parliamentary Research Service, Listing of tax havens by the EU, May 2018, p. 1.

33 ATO, Submission 5, p. 4. See for example, the OECD's no or only nominal tax jurisdiction, the EU's

list of non-cooperative jurisdictions for tax purposes, the Financial Action Task Force on Money Laundering's high risk and other monitored jurisdictions (map) and the Australian OECD Hybrid mismatch rules, where the rate of foreign income tax on the payment is 10% or less.

34 ATO, Submission 5, p. 3.

35 ATO, Submission 5, p. 4.

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2.36 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.36

Compliance with tax laws 2.37 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'.37 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.38

2.38 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.39

2.39 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

36 ATO, Submission 5, p. 5.

37 ATO, Submission 5, p. 4.

38 ATO, Submission 5, p. 4.

39 ATO, Submission 5, p. 5.

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adversely affect the business of entities prior to them having the opportunity to have a tax dispute decided by the court system'.40

2.40 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.41

Incongruity with the purpose and scope of the PGPA Act 2.41 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.42

2.42 The department highlighted that the PGPA Act was concerned with general governance and financial management issues, while the bill was concerned

40 ATO, Submission 5, p. 3.

41 CPA Australia, Submission 2, p. 3.

42 Public Governance, Performance and Accountability Act 2013, s. 5.

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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.43 The department was of the view that 'such obligations are well beyond the scope and objectives of the PGPA Act'.44

2.43 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.45

Independent oversight 2.44 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'.46

2.45 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'.47 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'.48 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.49

2.46 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.50

43 Department of Finance, Submission 7, p. 2.

44 Department of Finance, Submission 7, p. 2.

45 Department of Finance, Submission 7, p. 2.

46 Professor Louis de Koker, Submission 3, p. 1.

47 Professor Louis de Koker, Submission 3, p. 1.

48 Professor Louis de Koker, Submission 3, p. 2.

49 Professor Louis de Koker, Submission 3, p. 3.

50 Community and Public Sector Union, Submission 6, p. 2.

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2.47 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.

2.48 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.51

Committee view 2.49 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.

2.50 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,52 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.

2.51 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.

51 Dr Stein Helgeby, Deputy Head, Governance and Resource Management, Department of Finance,

Proof Committee Hansard, 5 August 2020, p. 13.

52 ATO, Submission 5, p. 3.

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2.52 The committee holds a number of serious concerns about the impracticality of the bill and its very poor suitability in several aspects.

2.53 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.

2.54 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.

2.55 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.

2.56 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.

2.57 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

22

considerably in recent years.53 The bill seeks to use yesterday’s language to address today’s problems.

2.58 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.

2.59 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.54

2.60 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.

2.61 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.

2.62 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.

53 Mr Paul McCullough, Division Head, Corporate and International Tax Division, Department of

the Treasury, Proof Committee Hansard, 5 August 2020, p. 15.

54 Mr Jeremy Hirschhorn, Second Commissioner, Client Engagement, Australian Tax Office, Proof

Committee Hansard, 5 August 2020, p.17.

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2.63 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.

2.64 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.

Recommendation 1

2.65 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

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Additional comments - Australian Labor Party

1.1 Labor Senators agree with the intent of this Bill. It is a perfectly reasonable community expectation that government procurement and grants not contribute to the profits of entities that utilise tax havens and other tax avoidance measures to minimise or indeed, eliminate the tax they would otherwise pay in Australia.

1.2 We acknowledge the evidence received by the Committee during the course of this inquiry that the Bill would create significant interpretative and administrative challenges to the agencies charged with ensuring compliance and the entities, particularly small and medium enterprises, on which it would impose obligations as outlined in Chapter 2 of the report.

1.3 We also note the submission of the Department of Finance in which the Department states that the PGPA Act is not a legislative scheme that is amenable to amendment to achieve the intent of the Bill presently before us.

1.4 We also note the evidence of Professor Louis de Koker and the Community and Public Sector Union that independent checks should be required of suppliers who currently self-disclose and self-certify, and that companies should be required to disclose any convictions or notices to comply issued to them in foreign tax jurisdictions respectively. These two matters are not dealt with in the Bill.

1.5 While we acknowledge that the government has enacted some measures to tackle black economy activity, we do not agree that those measures are directly relevant to the Committee’s consideration of this Bill. The tax avoidance measures that this Bill is directed against do not generally occur in the black economy. Rather, they occur in plain sight.

1.6 While Labor Senators do not support the passage of the Bill, we are of the view that there is considerable scope for the government to achieve the intent of the Bill through an effective legislative scheme that addresses the interpretative and administrative challenges and some other deficiencies of the Bill outlined in the report and the submissions received.

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Recommendation 1

1.7 That within the term of the 46th Parliament, the government commences work on a legislative scheme that will impose obligations on government suppliers and grant recipients to disclose their use of tax havens and similar tax avoidance practices and improve tax compliance through the administration of government procurement and grants.

Senator Tim Ayres Senator Kimberley Kitching

Deputy Chair Member

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Dissenting report - Senator Rex Patrick

Too Taxing for Officials

1.1 I thank the Committee and Secretariat for the work carried out in the conduct of this inquiry.

1.2 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.

1.3 Sadly, much more needs to be done.

1.4 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"

1.5 In 2017 the Commonwealth Government conducted a strategic water buyback with Eastern Australia Agriculture for $80 million for 29 GL of overland flow water.1 The Commonwealth paid $2745 per GL, despite an independent valuation stating that the price range should properly sit between $1100 to $2300.2

1.6 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.3 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.4

1.7 In response to questions asked at the Legal and Constitutional Affairs Legislation Committee Estimates hearing on 22 October 2019, the Australian

1 https://www.tai.org.au/content/thats-not-how-you-haggle

2 https://www.michaelwest.com.au/barnabys-boondoggle-documents-reveal-80m-price-for-watergate-licences-was-nearly-twice-valuation/

3 https://www.michaelwest.com.au/barnaby-joyce-angus-taylor-australia-and-the-caribbean/

4 https://www.abc.net.au/radionational/programs/drive/barnaby-joyce-responds-to-australias-watergate/11036040

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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"

1.8 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.

1.9 The Bill would:

(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.

1.10 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.

1.11 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.

29

1.12 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).

1.13 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.

1.14 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.

1.15 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 1

1.16 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

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Appendix 1 Submissions

Submissions 1 Ms Monica Mesch 2 CPA Australia 3 Professor Louis de Koker 4 Michael West Media 5 Australian Taxation Office 6 Community and Public Sector Union (CPSU)

 Response from Accenture  Response from Oracle

7 Department of Finance 8 Centre for International Corporate Tax Accountability & Research (CICTAR)  Response from Bupa  Response from Oracle

 Response from Serco

9 Publish What You Pay Australia 10 Nook Studios

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Appendix 2 Public Hearings

Wednesday, 5 August 2020 Committee room 2S1 Parliament House Canberra

Michael West Media - via teleconference  Associate Professor Michael West, Founder

Centre for International Corporate Tax Accountability & Research (CICTAR) - via videoconference  Mr Jason Ward, Principal Analyst

Australian Taxation Office - via videoconference  Mr Jeremy Hirschhorn, Second Commissioner, Client Engagement  Ms Rebecca Saint, Acting Deputy Commissioner, Public Groups

Department of Finance - via teleconference  Dr Stein Helgeby, Deputy Secretary, Governance and Resource Management  Mr Rod Schreiber, Acting First Assistant Secretary, Productivity and

Business Improvement Division, Governance & Resource Management  Mr Andrew Danks, Acting First Assistant Secretary, Procurement and Insurance Division, Commercial and Government Services

The Treasury  Mr Paul McCullough, Division Head, Corporate and International Tax Division, Revenue Group  Mr Greg Wood, Manager, Corporate and International Tax Division,

Revenue Group