Silver Bullet: an elegant cure for Government spending excess

by | Aug 5, 2020 | Government

If it’s good enough for tennis stars and entertainers, it’s good enough for multinational tax avoiders and consultants. Michael West addresses the Senate Inquiry into Finance and Public Administration today. This is an edited version of the opening statement to the Committee which oversees public accountability in which he calls for measures to protect Australian taxpayers from reckless spending and opaque disclosure.

This Committee has the power to set in train simple yet powerful reforms which will save taxpayers billions of dollars and improve the efficiency of Australia’s system of government contracts.

We, that is my contacts in accounting and tax law at Michael West Media, have some recommendations which include what we believe may be a “silver bullet” to address the challenge of Australian taxpayers’ money being funnelled into tax havens by multinational corporations and partnerships which themselves pay little or no income tax in this country.

We have long recorded here abuses of taxpayers’ money, such as money from large Defence contracts going into tax havens associated with a controversial Russian military tycoon (Malta, Seychelles and Marshall Islands in this case).

Then there are the likes of multinational tax avoider, Oracle, which reaps billions from taxpayers, paying zero income tax and, in this instance, has breached the Corporations Act no less than 42 times.

I believe the Committee is privy to many other examples and the need for transparency in our submission and in further links to this story below. There is a problem. The abuses of disclosure and tax avoidance by contractors are widespread.

Basic Disclosure Scheme – Michael West

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If Government procurement is to become efficient, transparency measures are absolutely vital. Transparency reform is at the heart of the billions of dollars in extra revenue which have flowed to the ATO since the Senate Inquiry into corporate tax avoidance in 2015.

Senate: less debt-loading, much more disclosure and tighten that PRRT!

Our recommendations to the Committee are:

1. transparency measures which include winning tenderers listing their related party entities and contracting entities (the money trail),
2. reasonable financial reporting standards which include providing ASIC with General Purpose rather than inadequate Special Purpose financial statements,
3. a ban on political party donations for those who tender for government work,
4. state disclosures tightened,
5. the Silver Bullet: a withholding tax on successful tenderers to ensure compliance.

To this last point first. The design of such a scheme for withholding tax is here and has been provided to the Committee. Australia’s international sportspeople and our artists and many others are subject to withholding tax. If they earn prize-money here for, say, a tennis tournament, a portion of that income is withheld.

We submit that government contractors should also be subject to a withholding tax at say 15%.

In this way, it would be incumbent upon the contractor to properly submit their tax returns, like everybody else, and then claim against their tax withheld depending on profit. Existing tax laws would apply to these determinations.

For the Revenue, the Australian Tax Office, this would mean it would be saved from having to choose who to drag through the courts to enforce compliance with the tax laws. Rather, the taxpayer would have to take the ATO to court if it were not satisfied.

Transparency

I note that Senator Rex Patrick, whose work on tax avoiders has been very robust, is espousing transparency measures for those who do Government work, particularly compelling them to disclose their tax haven connections.

Such measures are commendable but perhaps easy to game. An Oracle for instance might easily lump the relevant authority with a list of 200 global entities. Narrowing this reporting requirement to the “money trail” from the contract would be a logical measure.

In this way, the tenderer would be required to disclose those entities concerned in the delivery and provision of services in relation to the contract. This would encompass both related parties and external service providers.

On definitions, the Committee could deploy existing statutory schemes whose definitions of related parties are already established such as those of the Broadcasting & Television Act. The disclosure regime would also include a value test (size of contract) and appropriate corporate details (as per ASIC extracts) such as business names, addresses, place of incorporation, place of business and so forth.

The overarching intent of the legislation would be to include any relevant entities either directly or indirectly providing any goods or services for the benefit of the contract obligations assumed by the disclosing entity (whether or not it is a related party of that entity).

A decent accounting framework and enforcement

As submitted by my colleague the accounting academic Jeffrey Knapp to the Inquiry into Audit, a good deal of global companies operating in Australia lodge faulty and inadequate financial statements. This is a problem for regulators but has gone without redress for many years.

Successful tenderers for Commonwealth Government work, indeed any tenderers, ought to publish General Purpose financial statements. Inevitably, the arguments against these and other integrity measures will elicit a cry of “Red Tape” from the big business lobby.

Unlike small businesses however, large corporations have large compliance divisions to deal with regulatory requirements. We often see PDF documents, sometimes partly illegible, filed with ASIC via fax. For multibillion dollar companies this is clearly inadequate.

The benefit of this reasonable disclosure measure to enforce General Purpose reporting is that related party transactions and other useful information is made public, things which usually do not appear in Special Purpose reports.

Knapp and I have identified and published the names of dozens of multinationals which have lapsed from General Purpose to Special Purpose reporting without providing any reason. Less disclosure, lower accountability, no explanation. Demonstrably, audit and financial reporting standards have fallen in Australia and it would take little more than a Class Order from ASIC to address this.

Political donations

Government procurement and tendering is marred by the perception of mates-deals; that is, many of the successful tenderers – the Big Four consulting firms for instance – are also political party donors.

There is an integrity challenge here which undermines good governance; that the Big Four won $700 million in contracts for consulting and other services last year after making millions in donations to political parties is not only a bad look, it presents an unnecessary conflict of interest. Donations from those who tender for taxpayer funds should be banned.

State disclosure a mess

The Federal Government’s Austender register has its issues but it is far superior to even the best of the State disclosure regimes, some of which are non-existent. This leaves the opportunity for contracts to be handed out by the states which entail significant conflicts of interest. State taxpayers too deserve better.

Australian Defence contracts pass from Russian with money-laundering links to shady US military contractor Dyncorp

Oracle and EY: 42 breaches of the Corporations Act and counting

 

ABOUT THE AUTHOR

Michael West

Michael West

Michael West established michaelwest.com.au to focus on journalism of high public interest, particularly the rising power of corporations over democracy. Formerly a journalist and editor at Fairfax newspapers and a columnist at News Corp, West was appointed Adjunct Associate Professor at the University of Sydney’s School of Social and Political Sciences. You can follow Michael on Twitter @MichaelWestBiz.

7 Comments

  1. Avatar

    Dear Michael,
    I thought this article contains some very good suggestions. for the improvement of financial governance. Hopefully no one will argue against them. Why is that other media outlets have no interest in supporting these reforms that will benefi everybody?

  2. Avatar

    MichaelWestBiz, your article is clear and to the point. Australia’s Liberal/National coalition party government in leadership does not govern in the interests of the Australian people, I wonder, is this a form of treason launched against the Australian people?
    Australia’s Commonwealth Constitution clearly states that the governance of our nation must be in the best interests of the Australian people.
    This single matter gains no coverage from Australia’s mainstream media news bureaus, which in itself must brand them as co-conspirators with the Lib/Nat coalition party.
    This is as serious as it gets when the Lib/Nat coalition party have cast aside our nations constitution.
    Time to request Australia’s Governor-General to intervene into the all pervasive shortcomings that had previously underlain the former sovereignty of what used to be our proud Australia.
    Another observation is that this current government political party in leadership, going back to 1996 when John Howard as the Prime Mnister of Australia, he had begun the conversion of Australia into becoming a vassal of the USA. Its just a matter of consulting our Australian history books that happens to reveal this same John Howard had engaged in additional treasons against the Australian people.
    https://www.pm.gov.au/media/establishing-maritime-boundaries-timor-sea

    The current situation sees Australia’s Woodside Petroleum reluctant to aid Timor Leste to commence its oil and gas resource industry.
    Please Note: The link included just above depicts a very biased Australian government press release.

  3. Avatar

    Keep up the great work Michael & hopefully we will see positive changes made that benefit the country & not just those with deep pockets!

  4. Avatar

    good work – please keep it up thanks !

  5. Avatar

    The thought that any Gov does any deals with any entity in a Tax Haven is just wrong.
    If the entity is not transparent, do not deal with it at all.

  6. Avatar

    Hi Michael,
    I have been a contract engineer in Canberra for the last 13 years after working around the world for large European and US companies and you are preaching to the converted here. At 63 I can now see through treachery from a distance. You are correct and doing the right thing writing this all up however, some of these issues go all the way to the top (US Government even) and are deeply embedded into both, the Labor and Liberal parties. I have witnessed some doggy deals myself but you wont prove anything because you wont find the money. Another $100M Royal Commission that uncovers NOTHING. The only way to fix this country now is to get rid of both the Labor and Liberal parties completely, go Republic, end the ANZUS treaty and rebuild an independent nation with a new political party.
    Which other party you ask? Does it really matter at this point? Its time to pull our ship in for a complete refit and bottom scrape!!

  7. Avatar

    This piece is all over the place. It covers a lot of issues that need to be taken one by one.

    It is based on a submission to a Senate enqiry. We are not told explicitly the subject under consideration by the enquiry.
    In the introduction it is said to be about Australian government contracts. Perhaps then about geting value for money with government procurements. Then straight away, the piece veers off to focus on what the contracting company does with the money paid to it, regardless of whether it has given good value in exchange for it.

    The contracting company might put the money into a tax haven. The company might be avoiding tax that should be paid to the Australian government. We started supposedly with matters of government contracting but now we have moved to the issue of tax avoidance by multinational companies. Tax avoidance is tax avoidance whether a company earns its income from the government or any other source.

    To combat tax avoidance “transparency” is recommended. It appears to be the intention to raise the level of public disclosure, as if we should rely on investigative journalists to police our tax laws. Again, we are off on a new tack, disregarding the obvious option of reinforcing the Tax Office’s powers.

    At this point the writer has got to where he wanted to get to and spends a few paragraphs about the level of disclosure, in particular disclosure of “related parties”, that he would like to see. He could be right and it could be important but we are left to surmise what the arguments for it would be, apart from providing material of interest to financial journalists.

    Next subject political donations. Companies tendering for government contracts should not be allowed to make donations to political parties. The reason must be that government ministers might be influenced by donations to their party funds. Ok, but this principle lacks proportionality since it would prevent a company that does a small amount of business with the government from making modest donations.

    Then back to something about state and federal tender regiaters which is too fleeting to be at all informative. There might be material for a story here; the reader is no wiser.

    Meanwhile other themes have been woven in. The old story about multinational companies making profits here but paying no company tax. It may well be true and it sounds bad but we need a proper story about what is going on and how it rather should be, not just facile allusions. And Oracle we are told does not obey our laws anyway; no word on why our laws are supposedly not enforced when it comes to Oracle.

    The piece actually claims to have a simple solution to some or all of these problems, being a new withholding tax. This is just another claim with little visible means of support.

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