You may have heard of the recent Federal Court decision regarding US Oil giant Chevron and a $300 million, no? Well that’s ok, because I’m about to tell you all about it.
The full bench of the Federal Court unanimously dismissed the appeal against an ATO ruling that Chevron used an intra-company loan as a means of shifting profits offshore and avoiding tax on its Australian income.
The ruling examined a high interest, $US2.5 billion loan from a Chevron subsidiary in the United States to Chevron Australia. The judgement related to an ‘internal refinancing’ of Chevron Australia’s debt to fund the acquisition of Texaco Australia after a global merger between Chevron and Texaco.
The loan, from a Chevron shell company, charged a 9% interest rate to its nominal Australian parent company Chevron Australia Holdings Pty Ltd.
The shell company obtained the money via a loan at an interest rate of just 1.2%
The loan had two impacts;
- It significantly reduced the tax paid by Chevron in Australia, as they were able to deduct interest repayments from its taxable income; and
- Allowed the US Chevron company to make big profits on the difference between the low borrowing rate of 1.2% and the high lending rate of 9%
No tax was paid in the US on the profits.
The full bench unanimously upheld the trial judge’s ruling that the loan was not a genuine ‘arm’s length’ transaction and breached transfer pricing provisions of tax legislation.
The court affirmed that it is a requirement that such loans don’t “exceed what would be regarded as an arm’s length price expected to be incurred between independent parties dealing with each other at arm’s length”.
So, what’s the big deal?
It’s likely that this ruling will hold the same implications for similar cases, essentially showing multinationals that similar tax avoidance schemes will fail to avoid tax liabilities in Australia.
Chevron has a much larger, $42 billion loan that is likely to face a similar outcome.
This is the first matter to reach an Australian court which tests how transfer pricing rules apply to interest paid on a cross-border party loan.
The ATO will shortly release ‘detailed guidance to help companies with related party loans comply with Australia’s transfer pricing rules’
Chevron is considering an appeal to the High Court.