Last month, accountants in Sydney witnessed a significant victory as the Australian Taxation Office won a battle with Chevron Australia Holdings Pty Limited (CAH), with the Federal Court finding that the interest rate paid by the Australian resident company to its US subsidiary was not an arm’s length rate. The case considered both the former and current transfer pricing rules, which have been applied since 1 July 2013.
The issues argued in the case are complex. Still, in summary, CAH paid interest on a loan of US$2.45 billion at a rate of 8.97% to its Delaware-incorporated US subsidiary Chevron Funding Corporation (CFC). CFC had borrowed the funds at an initial interest rate of 1.2%, arguing that the markup compensated for the currency risk it took by borrowing in US dollars and lending Australian dollars to CAH.
The interest margin significantly reduced the group’s tax exposure in Australia. The interest payments made to CFC weren’t taxable in the US, then were tax-free under Australian tax legislation to the Australian company when returned to it as dividends.
The Federal Court found that the rate paid by CAH to CFC was above an arm’s length rate and ruled CAH liable to approximately AU$270 million in tax and penalties.
According to a report in the Australian Financial Review on 17 November 2015, Chevron will appeal the decision, which will likely go to the High Court.
Full details of the case can be found here.
*Correct as of November 2015
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