Tax & Accounting Blog

Transfer pricing lessons from Chevron case

Business Tax, Corporations, Governments, International Reporting & Compliance, ONESOURCE, Tax December 17, 2015

The Federal Court has recently delivered its long-awaited transfer pricing decision in Chevron Australia Holdings Pty Ltd v FCT (No 4) [2015] FCA 1092. The ATO won on all the major issues (except the currency of the borrowing), though not on all of the many issues argued in the case. The case and the judgment of Robertson J (over 200 pages) are enormous and it seems likely that there will be an appeal by the taxpayer given the amount of tax and penalties at stake. Whatever ultimately happens, the case will have great significance for the debt funding of Australian investments by foreign multinational enterprises in the future.

Writing in Thomson Reuters Weekly Tax Bulletin (Issue 46, 6 November 2015), Tony Frost, Managing Director, Richard Vann, Consultant, Greenwoods & Herbert Smith Freehills, Hugh Paynter, Partner, Herbert Smith Freehills, and George Condoleon, Director, Quantera Global, Sydney, discuss the major issues dealt with in the decision and implications for transfer pricing adjustments for income years from 2013.

The authors highlight various financing issues and in particular, they note that one of the most important issues in the case is the approach to determining the interest rate. In this regard, the authors note the judge’s opinion that the correct approach to determining the borrower’s creditworthiness is from the perspective of a commercial lender and not by reference to how an external credit ratings agency would rate the borrower. While the approach to determining the borrower’s creditworthiness from the perspective of a commercial lender is an issue for the Court to decide on expert evidence, the authors wonder how taxpayers are expected to go about this in practice given that banks’ internal credit risk rating processes are not transparent.

For income years commencing on or after 1 July 2013, the authors note that cases like Chevron are now dealt with under Subdiv 815-B of the ITAA 1997. In that sense, the Court’s finding and reasoning are only directly relevant for past income years to which Div 13 or Subdiv 815-A apply. Nonetheless, the authors say there are many messages in the judgment for the future of transfer pricing in Australia, regardless of the final outcome of any appeal process which may take some years to resolve.

Further, the authors note the case is important in relation to the use of experts in all future transfer pricing cases and asking them the right questions. One of the main reasons that Robertson J found so little of the evidence to be useful in Chevron, was because the experts had not been asked the right questions in light of the tests in the relevant legislation. The authors believe that this point is easy to make with the benefit of hindsight, but they say it emphasises again just how much judges will focus on the statutory language in preference to “industry lore” or the OECD guidelines. While the questions to be asked of experts in a Subdiv 815-B context will be different to those required for Div 13 because of the different statutory tests, the authors warn that great care is still required in briefing experts in future cases.

See the full article published in Thomson Reuters Weekly Tax Bulletin (Issue 46, 6 November 2015).

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