What you need to know
- The Federal Parliament is considering two bills to amend the Public Governance, Performance and Accountability Act 2013 (Cth) (PGPA Act). The PGPA Act has not been amended since August 2017.
- The first of these bills would impose new requirements on all grants processes, and nearly identical requirements for procurements valued over $4 million (or $7.5 million for construction services).
- Accountable authorities of "Commonwealth entities" undertaking grant processes, and non-corporate Commonwealth entities (NCEs) and prescribed Corporate Commonwealth entities (CCEs) undertaking procurements, will be required to collect and consider information regarding whether grant applicants and tenderers have links to prescribed tax havens. Further, the accountable authorities will need to publicise the number and value of arrangements entered into with tenderers and grant recipients with links to prescribed tax havens.
- The second of these bills will require the Department of Finance to report the number of debt waivers and act of grace payments it makes, and the total amount of each.
What you need to do
- Monitor the progress of these bills, and potential changes in the future in relation to procurement process as governments prioritise clamping down on multinational tax avoidance by entities with whom they contract.
- If the Tax Transparency Bill is enacted, you should consider updating your approach to market documentation to require each tenderer and grant applicant to provide information on its, and its associates', links to prescribed tax havens. The approach to market documentation will also need to make it clear that a failure to provide the required tax information will prevent the Commonwealth from accepting a tenderer submission or awarding a grant.
- You should also consider updating your internal policies and procedures to ensure you have systems in place to monitor and record the number and value of contracts entered into, and grants awarded to, entities with links to tax havens. If the second bill is enacted, you should ensure you have similar systems in place to record the number and value of waivers of debts and acts of grace payments made.
Overview and Background
Two bills have been introduced in the Senate which propose to amend the PGPA Act:
- Public Governance, Performance and Accountability Amendment (Tax Transparency in Procurement and Grants) Bill 2019 (Tax Transparency Bill); and
- Public Governance, Performance and Accountability Amendment (Waiver of Debts and Act of Grace Payments) Bill 2019 (Waiver of Debt and Acts of Grace Payments Bill).
The Tax Transparency Bill was introduced by Centre Alliance Senator Rex Patrick on 13 November 2019. Senator Patrick first spruiked the bill in April 2019 following the then Department of Agriculture and Water Resources' controversial water buyback agreement which involved an organisation based in the Cayman Islands. In August 2019, Senator Patrick also criticised the Treasurer of Australia, Josh Frydenberg, for failing to declare the number of Australian companies with related entities that are based in the Cayman Islands.
The Tax Transparency Bill was referred to the Senate Finance and Public Administration Legislation Committee on 14 November 2019, which received two public submissions before closing for submissions on 3 February 2020. The Committee is due to issue its report on the bill on 19 March 2020.
The Waiver of Debt and Acts of Grace Payments Bill was introduced by Labor Senator Katy Gallagher on 2 December 2019 and it is currently before the Senate. Senator Gallagher has stated that the intention of the bill is to provide transparency of the Minister of Finance's otherwise discretionary powers to waive debts and make payments to individuals and organisations.
Tax Transparency Bill
The Tax Transparency Bill would amend the PGPA Act to impose key collection, consideration and reporting obligations on accountable authorities of Commonwealth entities as follows:
- collect information by requiring tenderers to major Commonwealth procurements and grant applicants to disclose links to prescribed tax havens.
- consider an entity's links to prescribed tax havens and its compliance with applicable tax laws in deciding whether to accept a tender submission or award a grant.
- report the number and value of contracts entered into with, and grants awarded to, entities who have links to tax havens.
The Tax Transparency Bill follows the Black Economy Procurement Connected Policy by aiming to ensure the integrity of taxation practices through Commonwealth procurement. The bill will aim to clamp down on multinational tax avoidance by exposing Commonwealth contractors and grant recipients that are, or have associated entities, domiciled in recognised tax havens, as well as providing oversight of the Commonwealth entities that enter into those arrangements.
The Tax Transparency Bill also makes consequential amendments to the Taxation Administration Act 1953 (Cth). These amendments allow taxation officers to disclose an entity's tax affairs to an accountable authority for the purpose of deciding whether to accept a tenderer's submission or award a grant to an applicant.
Commencement
If enacted, the Tax Transparency Bill provisions will apply to procurements and grant processes that begin from the day after the bill receives Royal Assent. It will not apply to procurements and grant processes which are already on foot at that time.
Application
In relation to procurements, all accountable authorities of NCEs and of CCEs prescribed by the rules must comply with the collection, consideration and publication obligations. We expect the CCEs "prescribed by the rules" will be the same CCEs prescribed in rule 30 of the Public Governance, Performance and Accountability Rule 2014 (Cth) (PGPA Rules), consistent with the Commonwealth Procurement Rules (CPRs).
In relation to grants, all accountable authorities for "Commonwealth entities" (as that term is defined in the PGPA Act) must comply with the relevant obligations. This is broader than the application of the Commonwealth Grants Rules and Guidelines 2017 (CGRGs), which is only compulsory for NCEs and entities undertaking grant administration on behalf of NCEs.
Scope
The provisions in the Tax Transparency Bill would apply to a "relevant procurement" by a NCE or prescribed CCE. "Relevant procurement" is defined in the bill as:
- a procurement, within the meaning of the CPRs; and
- where the expected value is $4 million (or $7.5 million for construction services) or above.
The minimum value threshold is the same threshold that applies to the economic benefit to the Australian economy requirement in rule 4.7 of the CPRs. As officials must estimate the expected value of the procurement before a decision on the procurement method is made (rule 9.2 of the CPRs), they will need to identify these additional requirements early in the procurement strategy planning.
It is worth noting that unlike rule 4.7 of the CPRs, there are no general exceptions to the application of the provisions in the Tax Transparency Bill.
In relation to grants, the Tax Transparency Bill would apply to a process by a Commonwealth entity to award a "grant" (within the meaning of the CGRGs).
Prescribed tax havens
The Tax Transparency Bill provides that the Minister for Finance will prescribe certain countries, or parts of countries, as 'tax havens' in the PGPA Rules. However, the Minister must follow a process before prescribing a 'tax haven', including:
- consulting with the Commissioner for Taxation;
- publishing a notice specifying the proposed tax haven and inviting interested parties to make submissions on the proposal; and
- having regard to any submissions received from those interested parties.
If the Minister has not prescribed any country (or part of a country) as a tax haven for the purposes of the legislation within six months after it commences (regardless of whether the Minister has proposed a tax haven in accordance with the process above), the Minister will be required to publish an explanation for why this has not occurred on the Department's website.
Collection obligations
Accountable authorities for relevant procurements and grants covered by the Tax Transparency Bill must require tenderers and grant applicants to provide "tax-transparency information", which means the following:
- whether the tenderer/applicant, or its associates, are domiciled in a tax haven;
- if the tenderer/applicant or its associates are so domiciled, how the organisation or organisations have complied with any applicable laws in Australia or elsewhere that relate to tax; and
- any other information prescribed in the PGPA Rules.
If a tenderer's submission does not include in its tender submission, or the grant applicant does not provide, the required tax-transparency information, the accountable authority is precluded from accepting the submission or awarding the grant.
Associate
The Tax Transparency Bill defines an "associate" as follows:
| If the tenderer, grant applicant or grant recipient (as the case may be) is: |
"Associate" includes: |
| a body corporate |
a related body corporate (within the meaning of the Corporations Act 2001 (Cth)) of the body corporate |
| a partnership |
a partner in the partnership |
| an unincorporated association or body of persons |
a member of the committee of management of the association or body |
| a trust |
a trustee of the trust |
Consideration obligations
In deciding whether to accept a tenderer's submission or award a grant, the accountable authority will be required to consider the tax-transparency information as collected from the tenderer or grant applicant or otherwise obtained by the accountable authority. Further, the accountable authority must consult the Commissioner of Taxation when considering these matters.
Publication obligations
The Tax Transparency Bill does not propose to preclude Commonwealth entities from contracting with tenderers, or awarding grants to applicants, domiciled in tax havens, or who have associates domiciled in tax havens. However, the Commonwealth entity must include in its annual report the number of arrangements entered into with those organisations, and the value of each arrangement.
If enacted, this requirement will apply to annual reports for reporting periods that begin from the day after the bill receives Royal Assent.
Waiver of Debt and Act of Grace Payments Bill
The PGPA Act confers powers on the Finance Minister to:
- waive an amount owing to the Commonwealth (section 63); and
- authorise payments to a person if the Minister considers it appropriate to do so because of special circumstances (section 65).
The Department of Finance's Resource Management Guide No. 401, released in April 2018, guides the Minister of Finance and senior officials who have been delegated the power to consider requests of act of grace payments and waivers of debt. These remedies are generally considered a last resort, on the basis that:
- when a debt is raised, the Commonwealth has a right and, under rule 11 of the PGPA Rules, an obligation to pursue the recovery of the debt. A waiver under section 63 of the PGPA Act extinguishes the debt, meaning the Commonwealth cannot pursue the debt at a later date; and
- although "appropriate" and "special circumstances" are not defined for the purposes of act of grace payments, the guidance suggests the remedy is not available for merely unfair circumstances. Instead, the guidance provides examples such as legislation, policy or an act of an NCE which causes an unintended, anomalous or inequitable impact on a person.
Accordingly, the remedies are usually not used when there is another viable remedy available to redress the request.
New reporting obligations
The new Waiver of Debt and Act of Grace Payments Bill will require the Department of Finance to state in its annual report the number of waivers of debt granted, and act of grace payments made, by the Minister and the total amount of each.
Legislation in the Australian Capital Territory and Western Australia already requires government officials to report discretionary act of grace payments and decisions to write off or waive debts. However, this would be a new scheme for the Commonwealth.
If enacted, the provisions of the bill would apply to reporting periods that begin on or after 1 July 2019. This means that the newly required information would be included in the Department of Finance’s 2019-20 annual report, which is due to be released sometime after 30 June 2020.
Implications
The Tax Transparency Bill represents the most significant change to the PGPA Act since its inception. If enacted, NCEs and prescribed CCEs which undertake procurements, and Commonwealth entities which administer grants, should consider updating their request documentation to:
- require the provision of tax-transparency information from tenderers and grant applicants (and in some cases, their partners, related bodies corporate, unincorporated association management committee members or trustees);
- make it clear that the required tax-transparency information will be considered for the purpose of deciding whether to accept tenderers' submissions or award grants to applicants. Further, it should make it clear that tenderers' submissions will not be accepted, and applicants will not be awarded grants, if the tenderers and applicants do not provide tax-transparency information; and
It is worth noting that the Tax Transparency Bill does not impose any additional or ongoing responsibilities after accepting a tenderer's submission or awarding a grant. For example, the accountable authority is not required to collect, consider or publish tax-transparency information about government contractors and grant recipients throughout the life of the relevant arrangements, or if the entity's tax-transparency information changes after it is originally provided, such as when a partnership admits a new partner who is domiciled in a prescribed tax haven. The requirements are currently limited to the approach to market phase.
Going forward
Commonwealth officials should note and monitor the progress of the bills through parliament and any amendments made along the way, as well as for further changes to Commonwealth procurements in this area. The increased focus on reducing multinational tax avoidance may lead to further requirements on the Commonwealth to more closely scrutinise the taxation practices of entities with whom it contracts with, or awards grant to, in the future.
Authors: Sarah Ross-Smith, Partner, Angela Summersby, Partner, Steve McKinney, Partner, Tess Hemming, Senior Associate and Derek Smith, lawyer.
