Chevron Loses Court Appeal of Australia Tax Bill
By Robb M. Stewart
MELBOURNE, Australia--Chevron Corp. (CVX) lost an appeal of an Australian tax bill of more than 300 million Australian dollars (US$226 million) in what could be a landmark case for the country's tax office.
A full bench of the federal court backed a 2015 court ruling in favor of the Australian Taxation Office, which claimed the energy company owed taxes on a loan from a related company, mainly because the terms allowed the company to cut its tax bill through deductions on an unreasonably high interest rate charged by an associated company in the U.S.
The unanimous decision, handed down Friday, dismissed the appeal with costs.
The case is the first to reach an Australian court that tests the application of the tax office's transfer-pricing rules on interest paid on cross-border related-party loans. In an emailed reply to questions, the ATO said the decision is significant and has direct implications for a number of cases it is pursuing.
"We are heartened by the outcome, although note that the taxpayer has the opportunity to apply for special leave to apply to the High Court," the ATO said.
Chevron plans to review the decision to determine its next steps, which might include an appeal, a spokesman said.
"As recognized by the trial court in the dispute, the financing is a legitimate business arrangement, and the parties differ only in their assessments of the appropriate interest rate to apply," he said, adding that since 2009 Chevron Australia has paid almost US$4 billion in federal and state taxes and royalties.
At issue in the case was whether a loan to Chevron's Australian arm was deemed arms length. The tax office's transfer-pricing rules were designed to ensure multinationals don't obtain a tax benefit from mispricing loans to their Australian businesses.
The ATO claimed that Chevron Australia Holdings Pty. underpaid taxes by about A$340 million, including penalties and interest for the 2004-2008 fiscal years by deducting interest payments on a US$2.5 billion loan it received from Chevron Texaco Funding Corp.
According to the appeal ruling, Chevron Texaco Funding was set up in the U.S. to lend funds to its Australian parent at about 9% interest from money it raised by issuing commercial paper in the U.S. at a rate of about 1.2%.
In Friday's ruling, Judge James Allsop said the interest payments created a tax deduction for the Australian arm of Chevron against revenue from its stake in the North West Shelf natural-gas project in Western Australia. The interest, as income in the hands of Chevron Texaco Funding, wasn't taxed in Australia or the U.S., he said.
Given Chevron's policy on external funding and a willingness to provide a guarantee, "there would have been a borrowing cost conformable with Chevron's AA rating, which, on the evidence, would have been significantly below 9%," the judge said.
In the findings, he said he agreed with the trial judge that the US$2.5 billion debt was chosen "because it was the most tax efficient corporate capital structure and gave the best after tax result for the Chevron group."
Write to Robb M. Stewart at [email protected]