Tax Alert: Chevron Australia Holdings Pty Ltd v. Commissioner of Taxation decision releasedNov 19, 2015
On Friday 23 October 2015 the Federal Court of Australia released its decision in the case of Chevron Australia Holdings Pty Ltd v. Commissioner of Taxation. This long awaited decision, where final submissions were made by counsel in December 2014, addresses the arm’s length amount of the interest payable by Chevron Australia Holdings Pty Ltd (“Chevron Australia’) on an inter-company funding arrangement that Chevron Australia had with a subsidiary in the United States (“US”). The subsidiary had raised USD 2.45 billion through the issuance of commercial paper in the US market (backed by a Chevron group guarantee) and then on-lent those funds, denominated in Australian Dollars, to Chevron Australia in order to repay debts and fund its ongoing operations. The interest payable on the funding was calculated as 30-day Australian Dollar Bank Bill plus 414 basis points.
The Australian Taxation Office (“ATO”) challenged the amount of the interest payments under both Division 13 of the Income Tax Assessment Act 1936 (for the year ended 31 December 2003) and Subdivision 815-A of the Income Tax Assessment Act 1997 for the years ended 31 December 2004 through 2007 inclusive.
The decision of Mr. Justice Robertson, which runs in excess of 200 pages, addressed a broad range of issues including the application of the legislative provisions; whether Article 9 of the Australia-United States treaty created taxing rights (he found that they did not, in themselves); whether the introduction of Subdivision 815-A was unconstitutional (he found that it was not); and whether the Australian thin capitalization rules override the transfer pricing rules (he found that they do not). Ultimately, Mr. Justice Robertson concluded that despite the testimony of numerous witnesses, including transfer pricing experts, the taxpayer had not discharged its heavy burden of proof that the ATO’s amended assessments were “excessive”. Accordingly, although the parties shared the spoils on a number of technical issues throughout the judgment, the ATO won the key issues.
The decision touched on a number of important transfer pricing issues, including:
- The Judge found that, in principle, in the pricing of a related party loan, it is possible to take implicit parental support into account for transfer pricing purposes. However, he also said that in the absence of a legally binding parental guarantee, implicit credit support had very little, if any, impact on pricing by a lender in the real world; and
- He also set a very high standard for comparability when identifying supposedly comparable loan agreements in carrying out a benchmarking study, and made the point that the pricing decision should reflect the presence of financial covenants and security, if these would have been in place in any comparable lending arrangement between independent parties.
It is understood that Chevron Australia is considering whether it will appeal the decision. However, it is uncertain that there will be an appeal, and whether any such appeal would be successful and, in any case, it would take maybe two years to arrive at a final result. In the meantime, no doubt many multinationals will need to re-examine the terms of their intra-group financing arrangements and the pricing of their intra-group loans in the light of this decision.
Click on this link to access a copy of the decision: Chevron Australia Holdings Pty Ltd v Commissioner of Taxation (No 4) 2015 FCA 10922 (2)
Quantera Global will be sharing our thoughts and insights into the case over the next few weeks. In the meantime, if you would like to discuss this matter further, please contact one of the following:
• George Condoleon
• Stean Hainsworth
• Ashish Dave
• Douglas Fone