On April 21, 2017 the Australian Federal Court judged in the case between Chevron Australia Holdings PTY Ltd (CAHPL) and the Commissioner of Taxation of the Commonwealth of Australia. The dispute regards the question whether or not CAPHL is allowed to take a deduction into account for Australian Income Tax purposes for interest due over a Credit Facility Agreement that was made available by Chevron Texaco Funding Corporation (CFC, a 100% US-resident subsidiary of CAPHL). Transfer pricing principles play a central role in the judgment of the Court.

The purpose of the Credit Facility Agreement between parent and subsidiary was to effect an internal refinancing of an Australian currency debt of Chevron Australia Pty Ltd (“Chevron Australia”) and to fund CAHPL’s acquisition of Texaco Australia Pty Ltd (“TAPL”). CAHPL was established as the Australian holding company of the Chevron Group of Companies following the merger between Chevron Corporation (“CVX”), its ultimate United States parent company, and Texaco Inc. CFC was established in the group as a United States subsidiary of CAHPL for CFC to lend funds to its Australian parent at about 9% interest from money raised by CFC from the issue of commercial paper in the United States at a rate of about 1.2%. In June 2002 the shares in Chevron Australia and TAPL were transferred to CAHPL and were found by the learned trial judge to represent over 99.8% of the value of CAHPL. The TAPL shares were acquired by CAHPL for a consideration found by his Honour to be at fair value of AUD$1.529 billion from a temporary interest free loan from the transferor, namely Getty Mining International Inc (“Getty”). Chevron Australia had owed CAHPL AUD$1.9 billion before the transfer of its shares by Getty to CAHPL on a loan from Chevron Capital Corporation (“CCC”) following a return of capital to its then shareholder. The learned trial judge accepted that on 6 June 2003 CAHPL drew the Australian dollar equivalent of US$1.45 billion under the Credit Facility Agreement and that on 26 August 2003 CAHPL drew the Australian dollar equivalent of US$1 billion under the Credit Facility Agreement.

The effect of the interest payments made at the rate of 9% under the agreement created a tax deduction for CAHPL against its operating revenue from its interest, through subsidiaries, in the North West Shelf gas project. The interest as income in the hands of CFC was not taxable in the United States. Further, because CFC was a wholly owned foreign subsidiary of CAHPL, the dividends declared by CFC from the profits thus made were not assessable income in the hands of CAHPL. Thus, operating income that would otherwise have been assessable income was transformed, by the deduction for outbound interest and receipt of inbound non-assessable dividends, into non-assessable income.

The decisions as to the return of capital, the raising of funds in the United States and the debt level of CAHPL were made by officers of Chevron Treasury. As found by the primary judge, “CAHPL’s debt level of USD 2.5 billion was chosen [by Chevron Treasury] because it was the most tax efficient corporate capital structure and gave the best after tax result for the Chevron group”.

The dispute between the parties regards whether or not CAHPL is entitled to a deduction for the interest costs it incurred with respect to the amounts drawn under the Credit Facility Agreement. The discussion focuses on the question whether the remuneration that CAHPL pays over the amounts drawn is an at arm’s length remuneration. Furthermore the discussion focuses on the independence hypothesis and the questions whether or not that hypothesis necessarily requires the detachment of the taxpayer, as one of the independent parties, from the group which it inhabits and whether or not it requires the elimination of all the commercial and financial attributes of the taxpayer being part of the circumstances that gave the commercial shape to the loan the subject of the acquisition and that may be relevant to the consideration for the loan.

For further information click here to be forwarded to the text of the judgment as published on the website of the Australian Federal Court, which will open in a new window.

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