ATO wins Full Federal Court decision on Cross Border Financing - Chevron Australia Holdings case

Tax Alert

In a major Australian transfer pricing decision on Friday 21 April 2017, the Full Federal Court dismissed Chevron Australia Holdings Pty Ltd's (CAHPL) appeal related to the deductibility of interest on the Australian dollar equivalent of US$2.45 billion loans from the US subsidiary of CAHPL, Chevron Texaco Funding Corporation (CFC).

The Full Federal Court largely confirmed the judgment at first instance handed down by Robertson J in October 2015 in the Federal Court. Our earlier update on the 2015 Federal Court judgment can be found here.

The unanimous decision of Allsop CJ, Perram and Pagone JJ provides significant guidance on Australia's transfer pricing laws contained in Division 13 of the Income Tax Assessment Act 1936 (Cth) (Division 13) and Subdivision 815-A of the Income Tax Assessment Act 1997 (Cth) (Subdivision 815-A). Whilst the decision deals with certain administrative, constitutional and procedural issues, the decision is most important in terms of determining the arm's length consideration (particularly interest rates) applicable to cross border financing arrangements.

The two principal judges (Allsop CJ and Pagone J), taking a commercial and pragmatic approach, found that no independent lender and borrower dealing at arm's length would have entered into the borrowing arrangements in place without taking security or requiring covenants. In coming to this conclusion, their honours gave consideration to Chevron Group's external borrowing policy and effectively imputed a parent company guarantee to the loans in order to determine the arm's length consideration. This resulted in a lower interest rate and a subsequent tax bill (including penalties) of approximately $340 million.