The Australian Taxation Office has won a landmark transfer pricing case against Chevron.
Chevron appealed an earlier Federal Court decision that came down largely in favour of the ATO, which claimed the company owed roughly $340 million in taxes, penalties and interest on a 2003 loan for its North West Shelf gas project.
But a unanimous judgment by the full bench of the Federal Court on Friday reaffirmed the ATO’s position.
It said the appeal was dismissed, with costs.
Chevron said it would review the decision and could appeal to the High Court.
“As recognised by the trial court in the dispute, the financing is a legitimate business arrangement and the parties differ only in their assessments of the appropriate interest rate to apply,” a spokesman said.
At issue is whether the terms of the loan were at arm’s length, which is required under transfer pricing laws.
The decision has ramifications beyond Chevron, and even the oil and gas sector.
The ATO has flagged concerns about the “tax risk” associated with related-party financing, such as that which Chevron used. It says there were $420 billion worth of related-party loans in 2014-15.
It says interest expense to overseas parties has been increasing “but not at the same rate of increase as related party debt, implying a lower average interest rate being charged on that related party debt”.
“Consistent with the decision in Chevron, the commissioner will continue to take issue with arrangements in circumstances where an Australian subsidiary pays rates of interest on related party loans well in excess of what is – or would be – paid on external borrowings by the multinational group, including if the subsidiary had been allowed to obtain debt funding from an unrelated third party,” the ATO told a parliamentary inquiry.
Chevron Australia created a US subsidiary in the US state of Delaware called Chevron Funding Corporation (CFC). In 2003, CFC provided an unsecured loan to its parent. CFC borrowed at 1.2 per cent but on-lent the money at 9 per cent, which gave CFC significant profits.
And those profits were not be taxed either in the US or Australia.
“Thus, operating income that would otherwise have been assessable income was transformed, by the deduction for outbound interest and receipt of inbound non-assessable dividends, into non-assessable income,” Chief Justice James Allsop said in his judgement.
A Chevron spokesman said the company paid substantial amounts of tax in Australia, including royalties, payroll tax, fringe benefits tax, excise and interest withholding tax.
“Since 2009, we’ve paid almost $4 billion in federal and state taxes and royalties,” he said.
“We are one of Australia’s largest investors and employers. In addition to tax payments, Chevron will continue to deliver substantial economic benefits for decades to come.”
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