Australian Court rejects Chevron’s appeal in transfer pricing dispute

Australia’s Full Federal Court today dismissed Chevron’s appeal in a transfer pricing case involving intercompany loans, handing the Australian Taxation Office (ATO) a key victory.

By unanimous judgment, the full bench upheld an October 2015 Federal Court decision that approved ATO tax assessments against Chevron under Australia’s former transfer pricing provisions, Division 13 of ITAA 1936, and the current rules of Division 815 of ITAA 1997.

“Chevron is disappointed in today’s decision of the Federal Court of Australia regarding its financing dispute with the Australian Taxation Office. We will review the decision to determine next steps, which may include an appeal to the High Court of Australia,” the company said in a statement.

The dispute concerns USD 2.5 billion of loans made between 2004–2008 from Chevron’s Delaware subsidiary, ChevronTexaco Funding Corporation (CFC), to an Australian-resident group member, Chevron Australia Holdings Pty Ltd (CAHPL).

CFC borrowed funds in the US capital markets at an interest rate of about 2 percent and on lent the funds to CAHPL under a credit facility agreement at the rate of AUD-LIBOR + 4.14 percent, which, at the time, was equivalent to about 9 percent. CFC’s profit on the loan was returned to CAHPL as a tax-free dividend.

Chevron claimed the higher interest rate charged was equivalent to what unrelated parties would agree to at arm’s length because CAHPL did not provide any guarantee or security over assets to CFC and the agreement allowed the borrower to prepay the loan without penalty.

The ATO disagreed, claiming the interest rate and related interest deductions were excessive and assessing Chevron’s Australian subsidairy for unpaid taxes and scheme shortfall penalties for the 2004–2008 tax years.

The Federal Court, in its October 2015 decision, sided with the ATO, rejecting Chevron’s challenges to the assessments.

In today’s decision, Australia’s Full Federal Court rejected with costs Chevron’s appeal of the Federal Court decision.

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