Implications of Australian tax authority win in transfer pricing case
INSIGHT ARTICLE |
In a world where tax authorities are consistently on the losing end of court battles involving transfer pricing, the Australian Tax Office (ATO) victory in Chevron Australia Holdings Pty Ltd v Commissioner of Taxation is worth noting. The possible implications of the court decisions (the ATO prevailed both initially and upon appeal before the Full Federal Court), offer planning opportunity, especially if you have operations in Australia, have significant intercompany financing arrangements, or have similar facts to Chevron Australia.
In Chevron Australia, an Australian entity, Chevron Australia Holdings Pty Ltd (CAHPL), borrowed A$2.5 billion form its U.S. subsidiary Chevron Texaco Funding Corporation (CTFC). The loans were unsecured, the loans did not contain covenants, and the taxpayer determined an appropriate interest rate for the financial arrangement accordingly. The ATO held this interest rate was inconsistent with the arm’s length standard, was too high, and resulted in CAHPL claiming excessive tax deductions related to interest paid on the loans. The courts have upheld the ATO’s position, to the tune of some A$340 million. Our colleagues from RSM Australia provide a thorough and engaging synopsis of the case here.
The Chevron Australia decisions provide insight for anyone interested in transfer pricing in Australia. For financing arrangements, transfer pricing regulations in Australia showcase an approach which compares the actual intercompany transaction (called the Actual Transaction or AT) to a hypothetical transaction (HT). The HT is to be constructed with all the same terms as the AT except for the non-arm’s length features or conditions. This approach differs potentially from the more common transfer pricing approach adopted globally, which compares the AT to a separate, stand-alone transaction (sometimes referred to as an orphan transaction or OT). As expounded below, taxpayers would be well served to understand this concept of Australian transfer pricing.
Chevron Australia also provides insight for taxpayers with intercompany financing arrangements, regardless of jurisdiction. In Chevron Australia, the taxpayer argued the entire Credit Facility Agreement (CFA), including all rights, benefits, privileges, and facilities including cash access, should be the subject of the transfer pricing comparable analysis. In contrast, the ATO argued cash access should be the primary subject of the transfer pricing comparable analysis.
While the positions taken by the taxpayer and the ATO have unique considerations due to Australia’s hypothetical vs. actual distinction, Chevron Australia gives pause for broader consideration. Transfer pricing guidelines the world over (including the OECD’s guidelines) outline assessment using independent enterprises in comparable transactions and comparable circumstances. The 2010 OECD guidelines state “the arm’s length principle follows the approach of treating the members of an multinational enterprise group as operating as separate entities rather than as inseparable parts of a single unified business.”
The Chevron Australia decision, in some ways, turns this concept on its head. Chevron Australia suggests more emphasis can be placed on group synergies – items such as group credit standing, policies, and principles – not just standalone multinational enterprises. To wit, in Chevron Australia, CTFC had borrowed the funds in question from the U.S. commercial paper market in a third party transaction with an interest rate around 1.2 percent. The taxpayer argued a proper interest rate consistent with the arm’s length standard would have CAHPL pay CTFC an interest rate around 9.0 percent for the same funds, in large part due to considerations of CAHPL as a stand-alone, independent borrower. The ATO argued for a lower interest rate, with considerations for Chevron on a larger, group basis. In Australian court, the ATO has now prevailed. Twice.
How Chevron Australia is received and interpreted on a global scale remains to be seen, but it is certainly worth considering if you have operations in Australia, have significant intercompany financing arrangements, or have similar facts.