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.
1.2
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.
1.3
On 26 February 2020, the Senate granted an extension of time for reporting until 21 April 2020. On 23 March 2020, the Senate extended the committee's reporting date to 4 September 2020.
Purpose of the bill
1.4
The bill seeks to respond to the Government's expressed 'desire to combat multinational tax avoidance'. 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'. Similar tax-transparency measures would also be introduced to apply to 'arrangements for the provision of grants by Commonwealth entities'.
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 of Taxation, to 'prescribe foreign countries or parts thereof as tax havens'. 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.
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'.
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'. 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.
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.
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'. 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. 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.
1.13
Sections 49B to 49E of Subdivision B apply the new tax transparency regime proposed by the bill to 'CPR entities', 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.
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'. It establishes general duties and obligations for all officials of Commonwealth entities and companies in relation to the use and management of public resources. It also establishes rules for the broader governance, performance and accountability for the Commonwealth public sector.
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'. The core objectives of the CPRs is to ensure relevant entities achieve value for money in the conduct of procurement activity. 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.
1.19
The CPRs require entities undertaking procurement to ensure they do not benefit from supplier practices that may be dishonest or unethical. 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.
1.20
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 markets of the 47 current GPA members, that are collectively worth around A$2.5 trillion each year.
1.21
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).
1.22
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. 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)'.
1.23
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. Of these contracts:
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.
1.24
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).
1.25
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.
1.26
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.
1.27
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'.
1.28
Each Commonwealth entity 'must report, on GrantConnect, information on individual grants no later than twenty-one calendar days after the grant agreement for the grant takes effect'. 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
1.29
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. 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. The MAAL applies to significant global entities including both Australian-headquartered entities (with or without foreign operations) and the local operations of foreign headquartered multinationals.
The Black Economy Taskforce
1.30
The Government has recently made changes to the Commonwealth's procurement practices following the final report of the Black Economy Taskforce (the Taskforce).
1.31
The Taskforce was established in December 2016 'to develop an innovative, forward-looking and genuinely whole-of-government strategy to combat the black economy'. Its establishment followed an initial investigation by the Board of Taxation, supported by the Treasury and the Australian Taxation Office (ATO).
1.32
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;
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.
1.33
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.
1.34
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.
1.35
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, 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.
1.36
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.