A parliamentary inquiry into the public service's skills also heard Australian businesses have reported missing out on lucrative government IT contracts to major multinational companies using their size to bid low and out-compete smaller players.

Centre for International Corporate Tax Accountability and Research senior researcher Claire Parfitt said on Monday that labour hire firms should be required to report their tax payments for every country, showing federal agencies how much tax they were paying when deciding whether to award them contracts.

She said the 20 federal agencies with the highest contracting bills spent more than $6.8 billion in the last five years on labour hire companies - a figure that reflected government-imposed internal staffing limits on agencies.

"This spending has grown rapidly and without necessary oversight and controls," Dr Parfitt said.

"In addition to threatening the skills and capacity of the APS, generating risk regarding security and information in public services, contracting to these firms also threatens the government's fiscal position.

"A huge factor in driving that has been the cap on the Australian Public Service staffing."

Based on estimates that the government was spending $5 billion a year on labour hire companies, Dr Parfitt said public service expenditure on the contractors was the equivalent of 22 per cent of the wages bill for the federal bureaucracy.

However the government knew little about its own use of labour hire, including the international ownership structures of the multinationals winning contracts, she said.

The government was receiving contract bids on contracts from firms that were owned by the same parent company. Dr Parfitt called for a register forcing firms to declare their ownership structures.

Most of the labour hire firms were organised into complex transnational corporate structures designed to reduce and avoid taxes, she said.

"It is financially imprudent for the federal government and other public institutions to source labour through companies that are avoiding corporate income taxes, shirking good governance responsibilities and helping to drive down employment standards and personal income."

She urged the government to analyse the companies' tax avoidance schemes and called for rules requiring contractors to report their revenues and tax payments in each country they operate in.

Dr Parfitt said an analysis of some of the largest labour hire multinationals showed some, including Adecco and Outsourcing Inc, either paid no tax in Australia or did not report their tax payments.

Persol Australia Holdings paid $4 million in tax on $2 billion in revenue, implying a profit margin of 0.63 per cent in 2018-19. The company's global profit was nearly 5 per cent.

Recruit Holdings paid $8.7 million on $1.7 billion income, indicating a profit margin of 1.7 per cent.

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Dr Parfitt said Hays, by comparison, was the only company appearing to make good money in the labour hire sector, reporting a much higher profit margin than its competitors in Australia, and higher tax payments.

She recommended the public service minimise its use of labour hire, given the risks of using the companies' services.

"Dependence on labour hire undermines the capacity of the public sector to deliver the basics required in public administration," Dr Parfitt said.

"Worst still, when governments rely on labour hire firms that are engaging in aggressive tax avoidance, public money is channelled into overseas tax havens, supporting the profits of corporate giants while undermining funding for essential public services in Australia."

More information about contracts should be made public and there should be greater transparency about the past performance of companies on contracts in Australia and overseas, Dr Parfitt said.

Tax Justice Network spokesperson Jason Ward said Australian firms were being outbid for contracts by large multinationals who could bid cheaply and afford to sustain losses upfront.

In 2017, then-digital transformation minister Angus Taylor announced reform efforts to award more contracts to smaller suppliers.

However Australian businesses were missing out on much of the government's yearly $10 billion IT spend, Mr Ward said.

The inquiry continues.

Clarification: A previous version of this article stated tax accountability advocates had told the inquiry labour hire companies were receiving 5 per cent of the government's spending on the public service. They actually said labour hire companies were receiving the equivalent to 22 per cent of the government's spending on public service wages.