Victory in Chevron settlement supports strong transfer pricing
Chevron has withdrawn its appeal of the April 2017 ruling by Australia’s Full Federal Court in Chevron Australia Holdings Pty Ltd v Commissioner of Taxation. A Chevron Australia spokesman indicated the company reached a “reasonable resolution” with the Australian Taxation Office (ATO) on the transfer pricing dispute over an intercompany loan.
The ATO held that the interest rate on the US$2.5 billion intercompany loan from Chevron Texaco Funding Corporation (CTFC) was too high and inconsistent with Australian regulations, which resulted in Chevron Australia claiming excessive tax deductions related to the interest paid on the loans. Chevron Australia paid a 9 percent interest rate, determined by CTFC, on the unsecured loan that did not contain covenants. Though the resolution was not fully disclosed, the ATO’s assessment totaled A$340 million in tax and penalties.
The settlement marks another victory for the ATO, which could impact other multinational enterprises with similar related-party loan arrangements. The ATO has indicated discussions with a number of taxpayers with similar facts and circumstances are already underway, and has pledged strong action against multinationals believed to be avoiding payment of their fair share of taxes.
The Australian tax authority estimates it will collect an additional A$10 billion in receipts over the next ten years from companies with related party financing constructs similar to Chevron. Revenue and Financial Service minister Kelly O’Dwyer provided a statement saying, “Not only does this result put more revenue back to the Australian people, it also strengthens the ATO's position in pursuing other arrangements where multinationals seek to dodge Australia's transfer pricing rules.”
This comes as the ATO is expected to release a final set of guidelines concerning cross-border third party financing, which will shape the interpretation of future Australian transfer pricing rules.
It remains to be seen how many companies will receive scrutiny because of the settlement, but it will be important for multinationals with intercompany financing arrangements in Australia to deliberately and diligently review their transfer pricing support and documentation. In particular, any factors affecting intercompany debt charges, including interest rates, collateral positions, and associated covenants, should be considered from a transfer pricing perspective.