Bribes and facilitation payments: A guide to managing your tax obligations

Commissioner’s foreword

We are committed to providing a world-class tax administration for Australian business. Our objective is to administer the tax laws fairly and efficiently for all taxpayers.

In supporting the competitiveness of Australian business we look for ways to reduce compliance costs and make compliance as easy as possible, as well as providing avenues for certainty on contentious tax issues. Our aim is to smooth the way for business prosperity while maintaining a level playing field for all businesses.

As part of our commitment to business we have developed this publication. It provides practical guidance to help businesses manage their tax obligations in the area of bribes and facilitation payments.

We suggest initiatives that company boards can put in place and offer suggestions to help businesses meet their obligations under the law. We strongly recommend that businesses:

have a code of conduct across the business relating to bribes
have a strong internal audit function and audit committee, and
act to rectify any relevant internal control weaknesses identified and reported to the board by external auditors.

In preparing this document we consulted with key stakeholders, including the Business Council of Australia, the Corporate Tax Association, the Taxation Institute of Australia, Transparency International, Australian Stock Exchange and Standards Australia. I thank everyone for their valuable contribution.

This publication complements the Organisation for Economic Cooperation and Development publication, OECD bribery awareness handbook for tax examiners, and builds on advice from Transparency International.

The cornerstone of our work with business is boosting self regulation and enhancing governance processes that help identify risks before they eventuate.

Michael D’Ascenzo
Commissioner of Taxation

Introduction

Making payments to bribe public officials in Australia or overseas is a serious criminal offence which attracts significant penalties for both a company and its employees. Bribes are not tax deductible.

A facilitation payment is not regarded as a bribe and may be tax deductible. This is a payment of minor value to a foreign public official to secure performance of routine government actions of a minor nature.

The Tax Office is focusing on this area to ensure that claims for tax deductions and GST credits are legitimate, and that businesses have appropriate assurance processes in place.

Businesses that operate in jurisdictions where bribes and facilitation payments may occur may wish to consider their exposure to risk and act to:

understand the relevant Australian laws, including the difference between a bribe and a facilitation payment
implement assurance processes to minimise their risk of offending, and
be aware of our compliance activities in this area.

What is the Tax Office doing?

We are focusing on bribes and facilitation payments in our compliance activities with the intention of ensuring that only legitimate expenses are claimed as deductions (and that only legitimate GST credits are claimed). We will:

review significant, one-off, regular or embedded payments by Australian businesses to entities in jurisdictions where bribes and facilitation payments are known to be ‘part of doing business’
check that businesses with particular international trade profiles have appropriate codes of conduct and systems in place to detect bribes and confirm facilitation payments, and
review organisations that do not have appropriate systems in place.

We will pay particular attention to all businesses that have significant trading activities in countries that are given a low rating on Transparency International’s corruption perception index. In addition, as part of our senior tax officer visits to the top 100 companies twice a year, we will discuss bribes and facilitation payments and seek confirmation that the companies have assurance processes in place to minimise the risk of bribes occurring.

We have also issued guidelines for staff on the treatment of bribes and facilitation payments, Guidelines for Tax Office auditors – understanding and dealing with bribery.

These guidelines are modelled on the OECD bribery awareness handbook for tax examiners.

In identifying and dealing with deductions being claimed for bribe payments we are primarily concerned with protecting the revenue and maintaining community confidence in our administration. However, we also have an important role to play in the whole-of-government effort to combat corruption and bribery. We fulfil this role by referring information on suspected or actual bribe transactions to the Australian Federal Police for potential criminal investigation and/or prosecution.

Where warranted, and within the requirements of legislation, we will pass on information to the Australian Federal Police pursuant to section 3E of the Taxation Administration Act 1953.

What laws affect bribery and facilitation payments?

In 1999 Australia became a party to the OECD’s Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. The Australian Government subsequently introduced changes to the relevant tax and criminal legislation.

Sections 26-52 and 26-53 of the Income Tax Assessment Act 1997 (ITAA) deny taxpayers a deduction for bribes paid to foreign or domestic public officials. Deductions may be allowable for facilitation payments to foreign public officials (subsections 26-52(4)-(5)).

The Commonwealth Criminal Code Act 1995 (Criminal Code) makes it a criminal offence to bribe a foreign public official, whether in Australia or elsewhere. This means that Australian citizens and corporations can be prosecuted for actions undertaken overseas. The penalties for bribery include up to 10 years imprisonment and substantial fines. For further information see Division 70 of the Criminal Code.

Due to the similarity of the relevant laws, a payment which is considered a bribe for the tax law is also likely to be referred for criminal investigation.

What constitutes a bribe?

For tax purposes, a bribe is generally a benefit provided to another person that is:

not legitimately due to that person
provided with the intention of influencing a public official (who may or may not be the direct recipient of the benefit)
provided to obtain or retain a business advantage.

For example, a payment to a foreign trade official to secure or maintain foreign trade.

What constitutes a facilitation payment?

A facilitation payment is a payment of minor value to a foreign public official to secure performance of routine government actions of a minor nature, such as granting a permit or licence, providing utility services, or loading or unloading cargo. The action must be ordinarily and commonly performed by the official and must not involve a decision about awarding new business or continuing existing business. Facilitation payments are defined in subsections 26-52(4)-(5).

For example, on arriving in a foreign country, a business person is informed that their visa is invalid. The business person, who is entitled to a visa, pays a fee to a foreign public official for the sole purpose of expediting the issue of a new visa.

For tax purposes, facilitation payments are not bribes and may be deductible.

What can taxpayers do to meet their obligations?

To meet your business’s tax obligations, you can put assurance processes in place to ensure that your employees, agents or intermediaries who conduct business with government officials understand the law. These may be board-endorsed systems and processes that are tested and reviewed to assure the board that its processes, payments and people have integrity.

Assurance processes may include:

implementing a code of conduct that sets out expectations for the behaviour of employees, agents and intermediaries, including those acting for subsidiaries and joint ventures
ensuring internal auditors and audit committees have clear guidelines for the identification and escalation of risk
having external auditors assess your internal controls relating to bribery for risk
implementing an effective monitoring process to check the reputation and suitability of the agents or intermediaries you engage to act for your business in dealings with government officials
implementing an independent, confidential and impartial issues reporting function for staff and others to report possible criminal conduct to your senior management or government authorities
ensuring that company records can identify and substantiate facilitation payments.

We acknowledge that some businesses have already recognised and implemented the better practices needed to prevent the payment of bribes, including those outlined in Standards Australia International’s standard AS 8001-2003 titled Fraud and Corruption Control.

The level of assurance processes you implement will vary depending on whether your business is a large listed multinational or a smaller, closely-managed business with limited international dealings.

Code of conduct

Codes of conduct are designed to influence the behaviour of directors, key executives and employees.

The existence of a code of conduct helps assure us, taxpayers and the broad community that tax deductions claimed in Australia are in accordance with our tax laws. Establishing a code of conduct can also help to minimise your tax risk by ensuring that bribes to public officials are not paid in the first place.

The ASX Corporate Governance Council recommends that companies establish and disclose a code of conduct (Recommendation 3.1 of the Council’s Principles of Good Corporate Governance and Best Practice Recommendations [ASX Principles]).

Proposed amendments to the ASX Principles include a list of suggestions for the content of a code of conduct, including:

Describe the company’s approach to business courtesies, bribes, facilitation payments, inducements and commissions. This might include how the company regulates the giving and accepting of business courtesies and facilitation payments and prevents the offering and acceptance of bribes, inducements and commissions and the misuse of company assets and resources.

Our position is that an effective code of conduct should provide clear guidance on your business’s policies and expectations regarding the behaviour of employees, agents and intermediaries in relation to bribes and facilitation payments.

A comprehensive code will:

explain that your business does not countenance illicit payments to induce government officials to make favourable business decisions
outline the law in Australia relating to bribery of foreign public officials
offer guidance on what constitutes an acceptable facilitation payment or gift and what will be considered a bribe
make clear that an internal audit process will follow if there are any concerns about payment that appear to be bribes.

For greater assurance, a business could implement a process for reporting any payments or gifts made to government officials to senior management and for involving senior management in situations where doubt exists.

We recommend you take steps to ensure that all staff, including those working for subsidiaries and joint ventures, and company agents and representatives are aware of the expectations contained in the code of conduct.

You may also need to check if your business needs to comply with the provisions of the (US) Foreign Corrupt Practices Act. You may find it useful to refer to the requirements of this legislation when considering the assurance practices you should implement in Australia.

Internal auditors and audit committees

The board of directors has an important role to play in ensuring that proper governance processes are in place to manage the risk of incurring significant penalties for both the company and its employees as a result of employees bribing public officials.

To minimise the business’s tax risk, the board of directors can establish clear guidelines for its audit committee that set parameters for the identification and escalation of risk.

The audit committee’s role is to monitor the scope of the internal audit and review internal audit reports and management responses.

The internal audit function plays a significant role in evaluating and monitoring the adequacy and effectiveness of internal control systems. It plays a vital role in managing risks generally, including checking that bribes are not paid. The independence of these auditors is paramount, and direct reporting by the internal audit function to the audit committee would be an important control.

External auditors

In auditing company financial reports, auditors make risk assessments by, among other things, reviewing the company’s internal controls.

External auditors conduct audits in accordance with Australian Auditing Standards. Under these standards, auditors are required to identify any material weaknesses in the design or implementation of internal controls over financial reporting that come to their attention, and to report these to the company’s board of directors. We expect this would include any material weaknesses in internal controls relating to bribery.

Monitoring agents and intermediaries

Your business should carefully check the reputation, qualifications and history of business practices of potential agents or intermediaries. Fees paid for the services these representatives provide should be reasonable and in line with what would be paid locally for similar services – in particular, the level of remuneration should not provide any incentive to act improperly.

Your can implement a number of processes to provide greater assurance for your business. These include:

executing a formal agreement with agents or intermediaries that they will act in accordance with your business’s code of conduct
undertaking periodic contract monitoring to ensure your expectations around business conduct and performance are met, and
having a clear process for reporting and dealing with any improper conduct by an agent or intermediary – in particular, provision for timely termination of the agreement if any improper conduct occurs.

Staff concerns

You can initiate processes to protect employees who wish to report possible criminal conduct to senior management. If employees have some level of comfort that they can report conduct they suspect does not comply with the law, your business has greater assurance that corrupt practices will be minimised.

Such processes need to:

be independent and provide staff with the confidentiality they need to raise issues that affect them or the business
have three vital functions: complaint resolution (including interventions), analysis and reporting, and education; and
have standards of practice that enable the process to fulfil its role with integrity.

Standards Australia International has issued AS 8004-2003 Whistleblowing Programs for Entities, which you may find useful in establishing an appropriate reporting mechanism.

Company records

Implementing record-keeping processes to give the board information that identifies the size and nature of payments made to government officials would provide additional assurance. This would be particularly true of records that identify and report facilitation payments for review by internal and external auditors.

For the purpose of income tax law, the question is whether the person has kept records in a way that complies with section 262A of the Income Tax Assessment Act 1936. This section requires that records be kept for all transactions and that those records are adequate to explain the transactions. (Section 382-5 of Schedule 1 to the Taxation Administration Act 1953 sets out the record-keeping requirements for the claiming of GST credits.)

For facilitation payments, the Commonwealth Criminal Code Act 1995 sets out the following record making and retention requirements (Division 70):

a.

The value of the benefit concerned; and

b.

The date on which the conduct occurred; and

c.

The identity of the foreign public official in relation to whom the conduct occurred; and

d.

If that foreign public official is not the other person mentioned in paragraph 70.2(10(a) – the identity of that other person; and

e

Particulars of the routine government action that was sought to be expedited or secured by the conduct; and

f.

The person’s signature or some other means of verifying the person’s identitiy.

Failure to maintain records in this form may have important consequences if a person is prosecuted for bribing a foreign public official under the Criminal Code. The person will not be able to rely on a defence that the payments were facilitation payments, even if the defence would otherwise be available, if they have not kept the required records.

A failure to maintain records in the form required under the Criminal Code will not necessarily mean the person cannot claim a tax deduction.

These records should be available for audit and the accuracy of the particulars tested by following sound audit processes. Audit reports should be reviewed and, if necessary, acted on by audit committees.

References

ASX Corporate Governance Council’s Principles of Good Corporate Governance and Best Practice Recommendations

AS 8004-2003 Whistleblowing Programs for Entities

Compliance Program 2006-07

Criminal Code Act 1995 – Section 70.1 Definitions

Criminal Code Act 1995 – Division 70 – Bribery of foreign public officials

Criminal Code Act 1995 – Division 141 – Bribery

Criminal Code Act 1995 – Division 142 – Offences relating to bribery

Income Tax Assessment Act 1997 – Section 26–52 – Bribes to foreign public officials

Income Tax Assessment Act 1997 – Section 26-53 Bribes to public officials

Income Tax Assessment Act 1997- Division 995 Definitions

Income Tax Assessment Act 1936 – Section 262A Keeping of records

Taxation Administration Act 1953 – Section 3E Use of tax information by law enforcement agencies and eligible Royal Commissions etc.

Taxation Administration Act 1953 – Section 382-5 Keeping records of indirect tax transactions

(US) Foreign Corrupt Practices Act

OECD bribery awareness handbook for tax examiners

Standards Australia International’s standard AS 8001-2003, Fraud and Corruption Control

Guidelines for Tax Officers – understanding and dealing with bribery

Transparency International’s corruption perception index

Last Modified: Friday, 12 September 2008

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