ABC NEWS: US oil and gas giant Chevron faces one of the largest tax bills in Australian history after failing to overturn a Federal Court judgement being pursued by the Australian Tax Office.
- Federal Court makes a landmark ruling on offshore profit shifting by multinationals
- US energy giant Chevron faces a tax bill in excess of $300 million, plus costs
- The decision likely to have implications for similar settlements the ATO is pursuing
The landmark ruling leaves Chevron facing a tax bill well in excess of $300 million, as well as paying substantial costs, including those racked up by the ATO.
A Federal Court full bench unanimously dismissed the appeal against an ATO ruling that Chevron used an intra-company loan as a means of shifting profits offshore and avoiding tax on its Australian income.
The ATO said it was “heartened by the outcome” while noting that Chevron “has the opportunity to apply for special leave to apply to the High Court.”
The ruling examined a high interest, $US2.5 billion loan from a Chevron subsidiary in Delaware to Chevron Australia.
The decision may also have implications for a much larger $42 billion Chevron loan currently in place, which has a similar structure to the loan challenged in the court case.
It comes as the Federal Government undertakes a review of the tax paid by companies exploiting the massive oil and gas reserves on the North West Shelf, and after an extension of the Senate inquiry into corporate tax avoidance with a specific focus on offshore oil and gas.
Australian subsidiary not at ‘arm’s length’ of US parent
The full court judgement related to an “internal refinancing” of Chevron Australia’s debt to fund the acquisition of Texaco Australia after a global merger between Chevron and Texaco.
The loan, from a Chevron shell company, Chevron Texaco Funding Corp, charged a 9 per cent interest rate to its nominal Australian parent company Chevron Australia Holdings Pty Ltd.
The US Chevron company raised the money for the loan at an interest rate of just 1.2 per cent.
The loan had the dual impact of significantly reducing tax paid by Chevron in Australia, which could deduct interest repayments from its taxable income, and allowing the US Chevron company to make big profits on the difference between the low borrowing rate of 1.2 per cent and the high lending rate of 9 per cent.
Yet no tax was paid in the US on the profits.
The full bench unanimously upheld the trial judges ruling that the loan was not a genuine “arm’s length” transaction and breached transfer pricing provisions of tax legislation.
Transfer pricing provisions are designed to stop the domestic revenue base being eroded by the cost of cross-border acquisitions between related parties.
The law, the court said requires the terms of such loans don’t “exceed what would be regarded as an arm’s length price expected to be incurred between independent parties dealing with each other at arm’s length”.
Ruling likely to have implications for similar cases
Campaigners against multinational tax avoidance have welcomed the court decision.
“This an important victory for the ATO and the Australian people,” Jason Ward from the Tax Justice Network, Australia, said after the ruling.
“It sends a clear message to Chevron and other multinationals that these tax dodging schemes won’t be allowed any longer.”
Mr Ward said the decision “should have immediate implications” for Chevron’s much larger $42 billion loan, to fund development of its north west shelf gas facilities, which involved a similar internal debt financing, albeit with a far lower interest rate charged.
“A win on this case should give the ATO solid ground to require Chevron to restructure the current loan so that it is not artificially reducing profit and tax payments due in Australia,” he said.
Chevron admitted in a 2015 Senate hearing on corporate tax avoidance that the current loan, which is under audit by the ATO, could reduce tax payments in Australia by $15 billion.
In a statement, Chevron said it was “disappointed in today’s decision” and would “review the decision to determine next steps, which may include an 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.”
The ATO said 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”.
“In addition, Australia’s transfer pricing rules have been further strengthened since the years under consideration in the Chevron decision, and have most recently been bolstered by the Multinational Anti-Avoidance Law and Diverted Profits Tax.”
Chevron’s appeal challenged the way the commissioner applied Australia’s transfer pricing rules to limit income tax deductions for interest paid by an Australian subsidiary of a multinational group to another subsidiary in the same group.
This is the first matter to reach an Australian court which tests how our transfer pricing rules apply to interest paid on a cross-border related party loan.
In short, the court did not accept the proposition that the Australian subsidiary group of Chevron should be allowed to claim interest on the basis that its borrowings should be judged under the transfer pricing rules as if it was a standalone “orphan” company separate from the rest of the Chevron Group.
The ATO will shortly release “detailed guidance to help companies with related party loans comply with Australia’s transfer pricing rules”.
There are a couple of points in this story
According to this Article, “the Federal Court full bench unanimously dismissed the appeal against an ATO ruling that Chevron used an intra-company loan as a means of shifting profits offshore and avoiding tax on its Australian income.” They say – two lawyers, three opinions. It is rear when Judges unanimously agree. Unless, of course, the case vividly manifests significant number of evidence making disagreement impossible.
Second, the Article indicates that the decision to “upheld the trial judges ruling” can only mean that Federal Judges were convinced, beyond reasonable doubt, that “the loan was not a genuine “arm’s length” transaction and breached transfer pricing provisions of tax legislation“. I can conclude that the wording used by Federal Judges means that the presented set of evidence indisputably confirm intentional breach of the tax law.
Third, if the tax law breached intentionally, I would think that it may change qualification from “tax avoidance” to “tax evasion”. The difference is that, in most cases, tax avoidance is done within permitted legal limits or up to so-called “grey area”. Although it might lead to lengthy disputes or even fines, but it is unlikely to qualify as a crime. Whereby tax evasion is criminal offence. So, are we going to hear some more news regarding this matter?
Fourth, how would this ruling is going to affect Chevron’s solvency ratio?