ATO landmark win to create uncertainty for other multinationals
Chevron’s loss of an appeal in the Full Federal Court is arguably the biggest transfer pricing case won by the Australian Taxation Office (ATO) according to global tax and advisory firm BDO.
Zara Ritchie, Global Lead, Transfer Pricing commented: “It will boost the confidence with which the Commissioner of Taxation, Chris Jordan, pursues other multinational organisations who fund their operations in Australia with significant levels of related party debt. Especially if the interest rates charged do not appear to be commercial, not only in the Australian subsidiary’s context but also in the context of the whole group. This does not limit the focus to the companies in the oil and gas industry, but it is likely that significant number of recent infrastructure projects, and other cases with significant levels of related party debt will find themselves in the ATO sights. We are likely to see the ATO take on the increased number of audits for inbound funding arrangements in the very near future.”
“The loss of the appeal and the case as a whole, highlights the Australian courts’ view that the arm’s length principle can look past the legal agreement and examine the commercial and reasonable behaviour of the parties instead, and tax that conduct. This departure from the legal agreements will create significant uncertainty for all multinational corporations with related party transactions in Australia and creates a scenario where a more ‘theoretical’ (albeit potentially more commercial) view of the world is taxed.”
She continues: “In Chevron’s case, the group’s policy was to borrow externally at the lowest rate possible with a parental guarantee. The departure from this policy in Australia was viewed as uncommercial and irrational for an independent borrower in Chevron’s position. This view of focusing on what is commercial is not radically different however, from the Base Erosion and Profit Shifting (BEPS) enhanced transfer pricing guidance published in recent years by the Organisation of Economic Co-operation and Development (OECD).”
“The decision of the Full Federal Court in Chevron case may influence and empower the OECD, who is poised to publish BEPS-related guidance on the application of the arm’s length principle to intra-group financing arrangements. If this happens, the Chevron case may arguably become one of the most important transfer pricing related court cases not only in Australia but also across the globe,” Ms Ritchie said.