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Did we learn anything from the Chevron transfer pricing case? Has arm’s length price passed its use-by date?

Accounting, Accounting, Audit & Payroll, Audit, Blog, Business Tax, Checkpoint, Corporations, International Reporting & Compliance, ONESOURCE, Organisations, Tax January 23, 2018

In August 2017, Chevron Australia announced that it would abandon its ongoing transfer pricing dispute with the ATO.  This announcement means that, for the next few years at least, the Full Federal Court’s judgment handed down in April 2017 (Chevron Australia Holdings Pty Ltd v FCT [2017] FCAFC 62, reported at 2017 WTB 16 [486]) represents the leading authority on the workings of Australia’s past and current transfer pricing law. Writing in the December 2017 issue of Australian Tax Review, published by Thomson Reuters, Professor Graeme Cooper (Professor of Taxation Law, Law School, University of Sydney) asks, “What did we learn from the case?”. In his article, Professor Cooper identifies and outlines 6 important but unstated implications arising from the judgments and considers what they mean for the operation of transfer pricing law and the conduct of transfer pricing practice.

Some of the points made by Professor Cooper include:

  • While the ATO ultimately won the case both at first instance and on appeal, it lost some of the key propositions it had hoped to establish through this litigation.
  • In many respects, the ATO won not because of the merits of its own arguments and evidence but rather because the taxpayer was unable to meet its evidentiary burden – the taxpayer was unable to prove that the assessments issued by the ATO were “excessive”. “We do not know if the ATO’s judgment about the proper price was correct or insufficient; all we know with certainty is that it was not excessive.”
  • If the revenue authority can vary the terms of the arrangement, as well as the price, then which terms can be adjusted and which ones must be accepted? Almost any term can have an effect on price; some impacts may be modest and some may be significant.
  • One of the most striking features of the case is the copious amount of expert evidence led by both sides and the treatment of the various expert witnesses afforded by the judges. However, reading the judgment, “it is remarkable just how little influence these witnesses appear to have had in the proceedings”.
  • Don’t expect too much from the OECD Transfer Pricing Guidelines. The experience of Chevron is that if taxpayers and revenue authorities are expecting courts to follow the Guidelines, “this may still prove to be a forlorn hope”. Professor Cooper says that “it does not seem to bold to predict that when dealing with contentious issues, the Guidelines will likely be found either internally inconsistent or entirely uninformative or both”.
  • It is too great a stretch to claim that the arm’s length test will be replaced as a result of the Chevron decision, but it seems inevitable that one day tax policymakers will finally accept the arm’s length test is just impractical; the lesson of Chevron is the arm’s length standard is unable to handle even the simplest questions.
    • The price of using someone else’s money for a defined period of time is not an arcane question; it is mundane and humdrum. Yet the lesson of Chevron is that trying to apply the arm’s length standard to this straightforward transaction is simply imponderable. One need look no further than the way the ATO ran its case.
  • One can only hope that Chevron will hasten the move by countries to abandon the arm’s length test in favour of some other approach, the only benefit of which is that it is both practical and workable.

Read Professor Cooper’s excellent thought-provoking article in full in Australian Tax Review, Vol 46 No 4, December 2017 [p 227] – on Thomson Reuters Checkpoint platform or in hard copy.