What’s Been Happening? A Multinational Oil Giant Makes A Loan to Itself
In June 2003, a $2.5 billion credit facility was agreed between Chevron Australia and a U.S. subsidiary called Chevron Funding Corporation. Under the terms of the loan, CFC borrowed at 1.2 percent in the U.S. but on-lent the money at 9 percent which led to $1.1 billion in profits for CFC between 2004 and 2008. The profits were not taxed in either Australia or United States.
The Australian Taxation Office (ATO) issued amended assessments for each of the 2004 to 2008 tax years which amounted to an extra A$340 million tax bill owed but Chevron objected to the ATO’s assessment. The assessments were made on the basis that the interest paid by the Australian company was greater than it would have been if it was a dealing made between two independent parties that had no relationship to each other. In September 2014, a trial began and was subsequently ruled in favour of the ATO by the Federal Court in October 2015.
Chevron appealed the Federal Court decision in April this year but lost the appeal with the full bench of the Federal Court reaffirming the ATO’s position. The appeal was dismissed although Chevron continued to pursue to the matter to the next level by appealing to the High Court.
What Now? Undisclosed settlement
Chevron has withdrawn its appeal to Australia’s High Court following an agreement reached with the Australian Taxation Office on the loan transfer pricing dispute. Both parties declined to comment on the size of the settlement. As a settlement has been reached for these tax years, it is likely that terms have been agreed for future years as well which would push the total tax paid by Chevron to over $1 billion. In fact, the ATO had already audited returns from 2008 to 2013 over the same issues with a total of $1.062 billion in dispute.
The ATO’s initial estimates are that the Chevron decision will bring in more than $10 billion dolalrs of additional revenue over the next 10 years in relation to transfer pricing of related party financing.
What’s Next? Case Set As A Precedent, More targets for the ATO
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. ATO figures for 2014-15 reveal that Australian arms of multinationals had $420 billion in related party borrowings, meaning billions of dollars in interest payments could be subject to challenge and increasing scrutiny by the ATO. The receipt of funds from this case is a much needed windfall for the Australian government who holds over $700 billion in debt.
KPMG tax partner Grant Wardell-Johnson further commented that the case has meant that companies could no longer say that the subsidiary is completely independent of its parent. A transaction between related parties needs to be carefully considered to ensure that the transaction is dealt at arm’s length.