House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello MP)

Chapter 4 - Non-deductibility of bribes

Overview

4.1 Schedule 4 to this Bill will amend the Income Tax Assessment Act 1997 (ITAA 1997) to disallow a deduction for bribes made to foreign public officials. A taxpayer will be regarded as having made a bribe to a foreign public official to the extent that:

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an amount is incurred in providing a benefit to another person; and

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the benefit is not legitimately due to that person; and

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the amount is incurred with the intention of influencing a foreign public official in the exercise of the officials duties in order to obtain or retain business or an advantage in the conduct of business.

Summary of the amendments

Purpose of the amendments

4.2 The amendments will implement the recommendation of the Organisation for Economic Co-operation and Development (OECD) Council that member countries should deny tax deductibility for bribes made to foreign public officials.

Date of effect

4.3 The amendments will apply to the 1999-2000 income year and later income years. [Item 6, Schedule 4]

Background to the legislation

Non-deductibility of bribes

4.4 On 27 May 1994, the OECD Council made a recommendation that its member countries take effective measures to deter, prevent and combat the bribery of foreign public officials in connection with international business transactions. The OECD Council also recommended that each member country examine its tax legislation, regulations and practices, insofar as they may indirectly favour bribery.

4.5 Following further negotiations between member countries, on 11April 1996 the OECD Council made a further recommendation that member countries which do not disallow deductions for bribes made to foreign public officials should re-examine their taxation laws with the intention of denying deductibility for such expenditure.

4.6 Although the Government considers that the Australian business community has high ethical standards, it is supportive of OECD efforts to combat bribery in international business transactions. It shares the concerns of other member countries that the payment of bribes to foreign public officials causes economic and trade distortion. The Government, therefore, supports the recommendation to disallow deductions for bribes paid to foreign public officials.

4.7 The taxation amendments are consistent with recent amendments to the Criminal Code which make it a criminal offence to pay bribes to foreign public officials. The Criminal Code amendments are designed to ensure that Australia complies with the key feature of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, which came into force in Australia on 15 February 1999.

Current law

4.8 Section 8-1 of the ITAA 1997 allows deductions for losses and outgoings that are incurred in the gaining or producing of assessable income, or are necessarily incurred in the carrying on of a business for the purpose of gaining or producing assessable income. Section 8-1 does not differentiate between expenditure incurred in pursuing an illegal or a legal income-producing activity. Therefore, currently the payment of a bribe to a foreign public official may be an allowable deduction if the payment otherwise satisfies the requirements of section 8-1.

Benefits of the proposed legislation

4.9 Allowing tax deductions for bribes to foreign public officials contributes to the perception that such payments are an acceptable practice for those trading in the international business community.

4.10 The introduction of legislation disallowing tax deductions for such payments is conducive to creating a more level playing field in international trade and investment. Bribery distorts international competitive conditions and contributes to the misallocation of resources.

4.11 The taxation laws of many OECD member countries already deny a tax deduction for bribes paid to foreign officials. These amendments will align Australia's taxation position with the majority of other OECD member countries.

4.12 However, the amendments will not put Australian businesses at a disadvantage compared with other OECD countries, as the scope of the amendment will be similar to the revenue laws of our main trade competitors. For example, the United Kingdom (UK) does not allow deductions for bribes paid to foreign public officials if the bribe is a criminal offence. The United States (US) law adopts the same approach, but specifically excludes facilitation payments that expedite or secure the performance of routine government actions. The proposed amendments have a similar exclusion for facilitation payments.

Explanation of the amendments

4.13 Item 2 of Schedule 4 inserts new section 26-52 which deals with bribes to foreign public officials. Item 4 of Schedule 4 inserts the definition of bribe to a foreign public official into subsection 995-1(1) of the ITAA 1997.

4.14 New subsection 26-52(1) specifically denies a deduction for any loss or outgoing that is incurred by a taxpayer if it is a bribe to a foreign public official.

4.15 New subsection 26-52(2) lists the elements that constitute a bribe to a foreign public official. They are that:

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an amount is incurred by a taxpayer in, or in connection with providing a benefit to another person [new paragraph 26-52(2)(a)] ; and

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the benefit is not legitimately due to the other person [new paragraph 26-52(2)(b)] ; and

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the amount is incurred with the intention of influencing a foreign public official in the exercise of the officials duties in order to obtain or retain business, or to obtain or retain an advantage in the conduct of business [new paragraph 26-52(2)(c)] .

4.16 The following chart explains the operation of the new provisions.

Overview of the operation of new section 26-52

Providing a benefit to another person

4.17 The first matter to consider in determining whether or not an amount is a bribe to a foreign public official is whether the amount is incurred in, or in connection with:

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providing or causing a benefit to be provided to another person [new subparagraphs 26-52(2)(a)(i) and (ii)] ; or

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offering or promising to provide a benefit to another person [new subparagraph 26-52(2)(a)(iii)] ; or

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causing an offer or promise of the provision of a benefit to be made to another person [new subparagraph 26-52(2)(a)(iv)] .

4.18 Benefit is defined to include any advantage and is not limited to a benefit that is in the form of property. For example, it could include the provision of services. [New Subsection 26-52(2)]

4.19 It is not necessary under new paragraph 26-52(2)(a) that the taxpayer who bribes a foreign public official actually provides a benefit to that official or to another person. It will be sufficient if the taxpayer causes a benefit to be provided to another person; offers or promises to provide a benefit to another person; or causes an offer or promise of a benefit to be made to another person.

Benefit not legitimately due

4.20 The second matter to consider in determining whether or not an amount is a bribe to a foreign public official is whether or not the benefit is legitimately due to the other person.

4.21 New paragraph 26-52(2)(b) will be satisfied only if the benefit provided is not legitimately due to that person. There may be situations under the law or regulations of the foreign officials country where the recipient will have a legal right to remuneration for services rendered.

4.22 Accordingly, these amendments ensure that such a payment is not considered to be a bribe to a foreign official. However, if the payment exceeds the amount that is legitimately due to an official in a particular situation, it may be considered to be a bribe to the extent of the excess payment.

4.23 For the purposes of working out if a benefit is not legitimately due to the other person in a particular situation, no regard can be given to:

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the fact that the benefit may be customary, or perceived to be customary, in the situation [new paragraph 26-52(6)(a)] ;

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the value of the benefit [new paragraph 26-52(6)(b)] ;

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any official tolerance of the benefit [new paragraph 26-52(6)(c)] .

4.24 In other respects, the term not legitimately due will take its ordinary meaning.

4.25 For example, it might be argued that amounts paid to foreign public officials that are not lawful under local law might qualify as allowable deductions because such payments are commonly made and, therefore, are customary. Alternatively, it might be argued that no action is likely to be taken against an official who receives a bribe and, therefore, such behaviour is tolerated at an official level. New subsection 26-52(6) will preclude such arguments being raised by a taxpayer who wishes to claim a deduction for a bribe.

4.26 Similarly, the requirement to disregard the value of the benefit ensures that even a relatively small payment, when compared with the overall resources of an individual or organisation, may still meet the definition of a bribe, if the other requirements of new subsection 26-52(2) are satisfied.

Influencing a foreign public official

4.27 The third matter to be considered in determining whether or not an amount is a bribe to a foreign public official is whether the amount has been incurred with the intention of influencing a foreign public official in the exercise of that officials duties in order to:

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obtain or retain business [new subparagraph 26-52(2)(c)(i)] ; or

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obtain or retain an advantage in the conduct of business that is not legitimately due to the person who incurred the amount, or another person, as the recipient, or intended recipient, of the business advantage [new subparagraph 26-52(2)(c)(ii)] .

4.28 It is not necessary that the person who benefits or who may benefit is the foreign public official who the taxpayer is seeking to influence. For example, the new provisions may apply if a benefit is provided, or an offer or promise is made to provide a benefit to a relative or associate of the foreign public official, or any other person.

4.29 New subsection 26-52(8) provides that duties of a foreign public official are any authorities, duties, functions or powers that:

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are conferred on the official [new paragraph 26-52(8)(a)] ; or

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the official holds himself or herself out as having [new paragraph 26-52(8)(b)] .

4.30 This means that an amount incurred by a taxpayer to influence a foreign public official may be a bribe even though it is not within the scope of the officials duties to ensure that the taxpayer obtains or retains the business or the business advantage being sought.

Obtaining or retaining business

4.31 New subparagraph 26-52(2)(c)(i) covers the situation where an amount is incurred with the intention of influencing an official in the performance of the officials duties in order to obtain or retain business. The focus is firmly on benefits provided with the intention of influencing international business or trade.

4.32 The provision of a bottle of wine to a foreign public official each Christmas by a person who is frequently engaged in business dealings with the official during the year generally would not be considered to have been made to obtain or retain business. However, the provision of a holiday package to a foreign public official by a taxpayer who has tendered for some form of business, prior to the officials decision on the awarding of the tender, is highly likely to be regarded as having been provided with the intention of influencing the official.

Business advantage not legitimately due

4.33 New subparagraph 26-52(2)(c)(ii) deals with the situation where the intention to influence the official was in order to obtain or retain an advantage in the conduct of business that is not legitimately due to the person who incurs the amount, or another person, as the recipient, or intended recipient, of the business advantage. In other words, there must be a legitimate basis for obtaining or retaining the business advantage.

4.34 For example, the provisions will apply if a payment is made to obtain an operating permit for a new factory where the usual requirements for the issue of such a permit have not been satisfied. This is a clear example of a situation where a business advantage, being the permit, is not legitimately due.

4.35 In working out if a business advantage is not legitimately due to a person in a particular situation, no regard can be given to:

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the fact that the advantage may be customary, or perceived to be customary, in the situation [new paragraph 26-52(7)(a)] ;

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the value of the advantage [new paragraph 26-52(7)(b)] ;

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any official tolerance of the business advantage [new paragraph 26-52(7)(c)] .

4.36 The factors in new subsection 26-52(7) to be disregarded in working out if a business advantage is not legitimately due are the same as the factors to be disregarded in determining if a benefit is not legitimately due under new paragraph 26-52(2)(b) . In other respects the meaning of an advantage in the conduct of business that is not legitimately due is to have its ordinary meaning.

Payments that are legal in the foreign public officials country

4.37 New subsection 26-52(3) provides that an amount is not a bribe to a foreign public official if no person would have been guilty of an offence against the law of the foreign public officials country, if the benefit had been provided, and all related acts had been done, in that country.

4.38 This provision is intended to ensure that a deduction will not be disallowed if the provision of a benefit was lawful in the foreign public officials country.

Facilitation payments

4.39 New subsection 26-52(4) provides that an amount is not a bribe to a foreign public official if it is incurred for the sole or dominant purpose of securing or expediting the performance of a routine government action of a minor nature. In other words, a payment to a foreign public official for that purpose will be regarded merely as a facilitation payment.

4.40 This exception is similar to the exception provided under US law for a payment that is made to facilitate or expedite a routine government action. For example, it may be necessary in some situations to make a payment to a foreign official, political party, or party official to secure the performance of a routine government action. In some countries, such payments must be made to induce public officials to perform their routine functions. However, it is unlikely that a small facilitation payment would constitute a payment that is made in order to obtain or retain business or a business advantage.

Routine government action of a minor nature

4.41 New subsection 26-52(5) sets out a range of matters that will be considered in determining whether or not a particular action is a routine government action. For something to be a routine government action, it must be an action that is ordinarily and commonly carried out by the foreign public official [new paragraph 26-52(5)(a)] .

4.42 The term routine government action is intended to include the following actions or any actions of a similar nature:

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granting a permit, licence or other official document that qualifies a person to do business in a foreign country or in a part of a foreign country [new subparagraph 26-52(5)(b)(i)] ;

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processing government papers such as a visa or work permit [new subparagraph 26-52(5)(b)(ii)] ;

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providing police protection, or mail collection or delivery [new subparagraph 26-52(5)(b)(iii)] ;

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scheduling inspections associated with contract performance or related to the transit of goods [new subparagraph 26-52(5)(b)(iv)] ;

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providing telecommunications services, power or water [new subparagraph 26-52(5)(b)(v)] ;

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loading and unloading cargo [new subparagraph 26-52(5)(b)(vi)] ;

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protecting perishable products, or commodities, from deterioration [new subparagraph 26-52(5)(b)(vii)] .

4.43 An action of a foreign public official will not be regarded as a routine government action if it involves a decision or involves encouraging a decision about:

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whether to award new business [new subparagraphs 26-52(5)(c)(i) and (d)(i)] ; or

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whether to continue existing business with a particular person [new subparagraphs 26-52(5)(c)(ii) and (d)(ii)] ; or

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the terms of new business or existing business [new subparagraphs 26-52(5)(c)(iii) and (d)(iii)] .

4.44 New subsection 26-52(5) provides a basis for distinguishing between a situation where a payment would be regarded as merely a facilitation payment and a situation where a payment is likely to be regarded as a bribe.

4.45 For example, a manager in Australia authorises a payment to a foreign public official for the sole or dominant purpose of expediting the connection of a single phone in an office that already has 50 phones. The telephone connection is required to enable the business to carry on its normal business functions. The usual waiting time is three months, but as a result of paying a fee to the official, the telephone is connected almost immediately. In this situation, the payment would be regarded as having been made to secure the performance of a routine government action of a minor nature hence, the payment would be a facilitation payment.

4.46 Another example of a payment made to secure a routine government action of a minor nature is where, upon arriving in a foreign country, a business person is informed that his or her visa is invalid and that a fee must be paid to a foreign public official for the sole purpose of expediting the issue of a new visa.

4.47 The use of the term minor nature is intended to ensure that the exclusion will apply only to comparatively small payments, while at the same time overcoming the practical difficulty of specifying a monetary threshold in the legislation which would be appropriate in all circumstances. It is unlikely that a significant benefit would be provided merely to facilitate a routine government action of a minor nature.

4.48 An example of a routine government action that is not of a minor nature would be where an international banking corporation wishes to set up a banking operation in a foreign country and seeks to obtain a banking licence. The process is complicated and the waiting period is substantial, but a significant amount of money is paid to a foreign official to facilitate or expedite the process. In that situation, although it may be argued that the government action is routine, it would not be regarded as action of a minor nature and, therefore, the payment would not be a facilitation payment.

4.49 In accordance with existing requirements under section 262A of the Income Tax Assessment Act 1936 , persons carrying on a business will need to keep records of any facilitation payments incurred.

Definition of foreign public official

4.50 The term foreign public official takes the same meaning that is used in section 70.1 of the Criminal Code [item 5, Schedule 4] . The Criminal Code defines the term widely to mean:

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an employee or official of a foreign government body;

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an individual who performs work for a foreign government body under a contract;

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an individual who holds or performs the duties of an appointment, office or position under a law of a foreign country or of part of a foreign country;

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an individual who holds or performs the duties of an appointment, office or position created by custom or convention of a foreign country or of part of a foreign country;

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an individual who is otherwise in the service of a foreign government body (including service as a member of a military force or police force);

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a member of the executive, judiciary or magistracy of a foreign country or of part of a foreign country;

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an employee of a public international organisation or an individual who performs work for such an organisation under a contract;

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an individual who holds or performs the duties of an office or position in a public international organisation;

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an individual who is otherwise in the service of a public international organisation;

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a member or officer of the legislature of a foreign country or of part of a foreign country; or

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an individual who is an authorised intermediary (or holds himself or herself out to be an authorised intermediary) of a foreign public official.

4.51 The term foreign public official would include representatives of a foreign country who are present in Australia.

4.52 Employees or officers of public international organisations are included in the definition of foreign public official because foreign public officials can include persons who are officials of public international organisations.

4.53 The term public international organisation is also defined in section 70.1 of the Criminal Code . It is defined to mean an organisation of which two or more countries or the governments of two or more countries are members, or which has been established by an organisation of which two or more countries or governments of countries are members, or which is a sub-group established by such an organisation.

4.54 Foreign country is also defined in section 70.1 of the Criminal Code to include colonies or overseas territories, territories outside Australia whose international relations are, to any extent, the responsibility of another country and other territories outside Australia which are partly self-governing but are not recognised by Australia as sovereign states.

Expenditure not to form part of cost base

4.55 New subsection 110-25(9) provides that, to the extent that expenditure incurred is a bribe to a foreign public official, it does not form part of the cost base of any relevant asset for capital gains purposes [item 3, Schedule 4] . This will ensure that a taxpayer cannot gain any tax advantage as a result of giving a bribe to a foreign public official.

Capital Allowances

4.56 New subsection 26-52(1) ensures that no deduction is allowable under the ITAA 1997 for any loss or outgoing incurred by a taxpayer that is a bribe to a foreign public official. The effect of this is that bribes cannot form part of any capital expenditure that qualifies for a deduction under Part 2-10 of the ITAA 1997.

Signpost

4.57 Item 1 of Schedule 4 inserts a reference to bribes in the table of rules about specific types of deductions contained in section 12-5 of the ITAA 1997.

Application

4.58 The amendments made by Schedule 4 apply to losses, outgoings or expenditure incurred in the 1999-2000 and later income years. [Item 6, Schedule 4]

Commencement

4.59 Schedule 4 to this Bill commences immediately after the commencement of the Criminal Code Amendment (Bribery of Foreign Public Officials) Act 1999 (the CCA Act) [subclause 2(8)]. This is necessary because:

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the definition of foreign public official that this Bill inserts in subsection 995-1(1) of the Act has the same meaning as in section 70.1 of the Criminal Code ; and

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the CCA Act, which introduces that definition and other related definitions into the Criminal Code will commence on the earlier of the date on which it is proclaimed, or, if there is no proclamation, the first day after the expiry of six months from Royal Assent.

4.60 If Schedule 4 to this Bill was to commence prior to the commencement of the CCA Act, the reference to the definition of foreign public official in item 5 of Schedule 4 would not be effective until the commencement of the CCA Act.

Regulation Impact Statement - Non-deductibility of bribes made to foreign public officials

Policy objective

4.61 The policy objective is to give effect to a recommendation by the OECD Council that member countries deny tax deductibility for bribes to foreign public officials.

4.62 This recommendation was initiated by the US which was concerned about the competitive disadvantage faced by its businesses which could not claim tax deductions under US revenue laws.

Implementation options

4.63 The implementation of the Governments policy objective involves three options.

Option 1 Deny deductions for all bribes made to foreign public officials

4.64 This option would require amendments to the ITAA 1997 to disallow deductions for all bribes made to foreign public officials. A bribe is a payment made with the intention of influencing an official in order to obtain or retain business or a business advantage that is not legitimately due. For example, this would be the case where an amount is paid in order to receive an operating permit for a factory where the person has failed to satisfy the statutory requirements for issue of such a permit.

4.65 The proposed amendments would apply in respect of amounts incurred in the 1999-2000 and later income years. There are no transitional arrangements.

4.66 The administration costs will be minimal as changes to Australian Taxation Office (ATO) administrative procedures will not be required. However, the ATO may need to allocate resources to ensure that bribes are not being claimed as tax deductions. ATO auditors would, in the course of an audit, check to see if any expenditure being claimed as a deduction constitutes a bribe to a foreign public official.

4.67 There is no indication of what it would cost to enforce the measure because the ATO does not keep records of businesses that are paying bribes to foreign public officials. Also it is not possible to ascertain how much trade depends on the payment of bribes to foreign public officials.

4.68 Taxpayers will be advised of the new provisions via consultative forums with businesses and tax agents, and through ATO publications.

4.69 No additional information will be required from taxpayers as part of the implementation of this measure.

Option 2 Deny deductions for bribes made to foreign public officials other than facilitation payments

4.70 This option would require amendments to the ITAA 1997 to disallow bribes made to foreign public officials, but it would allow deductions for facilitation payments made to foreign public officials. This option is similar to the deductibility rules applying under the US revenue laws.

4.71 A facilitation payment is a payment to expedite or to secure the performance of a routine government action by a foreign public official. For example, a manager in Australia authorises a payment to a foreign public official to expedite the connection of a single phone in an office that already has 50 phones. The telephone connection is required to enable the business to carry on its normal business functions. The normal waiting time is three months, but by paying a fee, the telephone is connected almost immediately.

4.72 The proposed amendments would apply in respect of amounts incurred in the 1999-2000 and later income years. There are no transitional arrangements.

4.73 The administration costs will again be minimal as changes to ATO administrative procedures will not be required. Resource costs may be higher than Option 1 because more checking may need to be done to ensure that bribes are not being claimed or disguised as facilitation payments.

4.74 It is anticipated that the distinction between a bribe and a facilitation payment is clear enough so that costs involved in contesting the issue will be kept to a minimum.

4.75 Taxpayers will be advised of the new provisions through consultative forums with businesses and tax agents and through ATO publications.

4.76 No additional information will be required from taxpayers as part of the implementation of this measure.

Option 3 Deny a deduction for all bribes made other than facilitation payments

4.77 This option would require amendments to the ITAA 1997 to disallow all bribes whether made to foreign public officials or to domestic public officials. However, facilitation payments made to foreign public officials would still be an allowable deduction.

4.78 The proposed amendments would apply in respect of amounts incurred in the 1999-2000 and later income years. There are no transitional arrangements.

4.79 The administration costs will be minimal as changes to ATO administrative procedures will not be required. However, the ATO may need to allocate resources to ensure that bribes are not being claimed as tax deductions.

4.80 Taxpayers will be advised of the new provisions via consultative forums with businesses and tax agents, and through ATO publications.

4.81 No additional information will be required from taxpayers as part of the implementation of this measure.

Assessment of impacts (costs and benefits)

Impact groups

4.82 The groups impacted by the disallowance of bribes made to foreign public officials are as follows:

Government

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the Commonwealth Government will gain revenue as bribes will not be claimed as a deduction;

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Australia's reputation in the international community will be enhanced;

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bribery raises business costs, creates uncertainty and distorts international trade and investment. Consequently, trade may be adversely affected when Australian exporters and other companies have to compete with countries that continue to allow a deduction for bribe payments.

Taxpayers

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the net cost of paying a bribe to obtain or retain business in foreign countries will increase;

•

Australian taxpayers operating overseas may be disadvantaged as they will no longer be able to claim bribes as an expense of doing business in foreign countries. In particular, firms in the engineering and construction sectors, infrastructure providers, defence contractors and manufacturers are likely to be most affected by the proposed changes. Also service providers such as lawyers and accountants may also face increased costs as a result of the proposed amendment.

Assessment of costs Option 1

4.83 The compliance cost to affected taxpayers of this change will be minimal and will be limited to learning about the new legislation. There may be a small compliance cost imposed on taxpayers having to categorise outgoings according to the definition of a bribe payment. Businesses that cease paying bribes may lose some business as a result. Alternatively, businesses that continue to pay bribes will no longer be entitled to a deduction for the expenditure incurred.

4.84 Compliance levels should increase over time as international community tolerance to bribery decreases. However, Australian businesses may face a competitive disadvantage against US businesses, which are entitled to claim a deduction for facilitation payments.

Assessment of benefits Option 1

4.85 As the ATO does not collect data on bribery payments, it is not possible to quantify the impact on revenue. However, the Government considers that Australian businesses are not significantly involved in bribing foreign public officials. Accordingly, any increase in revenue resulting from this measure should be minimal.

4.86 Australia's standing internationally will improve as bribery distorts international competitive conditions, and contributes to the misallocation of resources.

4.87 The present system of allowing bribes to be claimed as a deduction against income tax contributes to the perception that such payments are an acceptable practice for those trading in the international business community. The proposed changes will discourage that perception and will be seen to enhance the integrity of the taxation system. It will also align Australia's taxation position with the majority of OECD member countries.

Assessment of costs Option 2

4.88 The compliance costs to taxpayers of this change will be similar to Option 1. Some additional costs may be incurred by some taxpayers who would have to determine whether an amount incurred is a bribe to a foreign public official or is merely a facilitation payment.

Assessment of benefits Option 2

4.89 The benefits from denying deductions for bribes will be the same as in Option 1. However, there are a number of added benefits from excluding facilitation payments from the definition of a bribe.

4.90 Taxpayers will still be able to claim a deduction for facilitation payments made to foreign public officials. This exclusion will allow a deduction for expenses incurred in order to facilitate or expedite the performance of a routine government action of a minor nature in the course of conducting business in foreign countries.

Assessment of costs Option 3

4.91 The compliance costs of this option will be higher than the previous two options as the measure will affect many more taxpayers. The total compliance costs, however, are still not expected to be large as they will be limited to taxpayers learning about the change.

Assessment of benefits Option 3

4.92 The benefits are considered to be similar to Options 1 and 2. The gain to the revenue is considered to be minimal as it is not considered that taxpayers would generally be claiming a deduction for such expenses.

Consultation

4.93 The OECD also endorsed criminalising bribery of a foreign public official. Consequently, the ATO and the Attorney-Generals Department have liaised on a number of aspects in relation to this matter.

4.94 A number of large corporations and several government agencies were consulted in developing this proposal, together with representatives from professional bodies and academic institutions. The measure has also been examined by the Joint Committee on Treaties.

4.95 Option 2 is the preferred option of small business.

Conclusion

4.96 The preferred option for implementing the Governments policy objective is Option 2; that is, to disallow deductions for bribes made to foreign public officials, but to exclude facilitation payments from the definition of a bribe.

4.97 The proposed amendments will implement the recommendation of the OECD Council. That recommendation is supported by the Australian Government. The exclusion of facilitation payments from the definition of a bribe is consistent with the commentaries on the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

4.98 It is a longstanding principle that Australia's tax law allows deductions for expenditure incurred in deriving assessable income, irrespective of whether the expenditure relates to legal or illegal activities. Although disallowing bribes paid to foreign public officials would be an exception to this principle, it can be justified on the grounds that it will enable Australia to implement the OECD recommendation and align itself with the majority of OECD countries. To take the restriction further (eg. to implement Option 3) would raise broader tax policy issues that require further consideration.

4.99 Option 2 will satisfy Government and community expectations by contributing to a more equitable and efficient world market.

4.100 Treasury and the ATO will monitor this taxation measure, as part of the whole taxation system on a continuing basis. In addition, the ATO has consultative arrangements in place to obtain feedback from professional and small business associations and through other taxpayer consultation forums.

4.101 The OECD Committee on Fiscal Affairs in cooperation with the Committee on International Investment and Multilateral Enterprises will continue to monitor the implementation of the recommendation.