Chevron loses A$340m transfer pricing battle

Multinationals operating in Australia have been put on notice after Chevron lost a landmark transfer pricing case against the country’s tax department, with potential implications for the loans that overseas companies use to fund their activities in the country.

The Federal Court’s bench on Friday unanimously dismissed an appeal by Chevron against a 2015 ruling by the court. It had found mostly in favour of the Australian Taxation Office’s claim that the oil and gas group owed A$340m ($256m) in taxes, penalties and interest on a 2003 loan used to finance a large gas project off the coast of Western Australia.

The decision “has direct implications for a number of cases the ATO is currently pursuing in relation to related-party loans, as well as indirect implications for other transfer pricing cases”, the ATO said.

About 2,600 companies claimed A$14.5bn in interest deductions on A$420bn worth of loans from overseas parties in 2014-15, according to ATO data.

The win for the ATO comes amid a broader crackdown targeting multinational tax avoidance, and in the wake of the UK’s “Google tax”. The Australian government has also flagged reviewing its tax regime for oil and gas companies owing to concerns it is missing out on its share of profits from the A$200bn investment boom in the liquefied natural gas sector.

The Chevron case, which is also the biggest in Australian history, centred around whether the terms of a $2.5bn inter-company loan were at “arm’s length” and therefore complied with transfer pricing laws.

The credit facility, established in 2003, saw Chevron Australia paying interest of 9 per cent to a Chevron subsidiary that was able to make use of the company’s AA rating and borrow in the US at 1.2 per cent. This resulted in profits for the subsidiary of A$1.1bn in the 2004 to 2008 tax years, which were not taxed in either Australia or the US.

The ATO contended the terms of this loan arrangement allowed Chevron to claim excessive interest deductions and reduce its tax bill in Australia. The tax office had issued the company with amended assessments for the 2004 to 2008 financial years, to which Chevron objected.

Although the 2015 ruling was largely in favour of the ATO, it did not relate to anti-avoidance, and Justice Alan Robertson said there was no “evidence that the credit facility was a sham”.

Chevron said it was “disappointed” with the Federal Court’s decision, would review the ruling and may appeal to the High Court of Australia.

“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,” Chevron said.

The ATO said it was “heartened by the outcome”, adding that the most important issue in multinational taxation was “ensuring that the Australian arms of companies have arm’s length…

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