The Full Federal Court has affirmed the decision of a single judge of the Federal Court, that Chevron Australia had not discharged its burden of proof that it had made an arm’s length agreement to pay interest to its US subsidiary (not its parent): Chevron Australia Holdings Pty Ltd v Commissioner of Taxation  [2017] FCAFC 62.

Any appeal can only be by Special Leave, to the High Court. It is not obvious that such leave would be given notwithstanding the large amount at stake,  as all judges of the Federal Court, at first instance and on appeal, found for the Commissioner i.e. the decision is not attendant with sufficient doubt.

The issue arose as Chevron’s US subsidiary borrowed in US$ at approximately 1.2% interest in the US with the support of the ultimate holding company in the US, but lent to Chevron Australia unsecured  in A$, at about 9%. The Commissioner’s winning argument was that Chevron Australia would have been able to borrow with the support of its ultimate US parent in an arm’s length transaction, and its actual borrowing without that support at a higher rate of interest, was able to be disallowed even though the rate of interest paid might have been supportable had it not been who it was. Also, the loan from an arm’s length party would have been secured.

That is, it is not just the pricing of the loan that is relevant, but also the conditions prevailing between the parties that needs to be considered under Australian transfer pricing rules. Whilst the case was decided under the now repealed  Div 13 and Div 815-A, the judicial approach displayed is likely to be unchanged under the new Div 815-B.

The case was also interesting for what it did not decide. The borrowing by Chevron Australia from its US subsidiary (rather than its parent) appears to have been part of a wider scheme to achieve an Australian tax benefit without a US tax detriment. It may have been that by the time the Commissioner acted, he was out of time to apply the general anti-avoidance provision, Part IVA, whereas at the relevant time, transfer pricing adjustments could be made without a limitation period.

The egregious aspect was that the US subsidiary was transparent for US tax purposes (and so the interest paid  to the US was not taxed in the US), whereas the interest paid to the US was able to be paid back to Chevron Australia as a tax free dividend from its subsidiary under the former s23AJ (now s768-5). Normally an Australian subsidiary of a US multi-national group would have borrowed from a parent which would have paid US tax.

 

Contributed by: Pointon Partners, Robert Gordon, E: rmg@pointonpartners.com.au, W: www.pointonpartners.com.au