Chevron Corp., the largest U.S. oil producer after Exxon Mobil Corp., hopes to raise as much as $10 billion this year from global asset sales to counter the profits-sapping slump in energy prices, reports BNA.
Benchmark oil prices have been stuck at around $50 a barrel since the start of the year, which means influencing the global policy for the taxation of multinational companies may not be a similar priority for Chevron CEO and Chairman John Watson. Yet that is exactly what the U.S.-based oil producer has managed in its failure to win an appeal in Australia over a long-running transfer pricing dispute, according to tax practitioners.
The April 21 ruling from Australia’s second-highest court may both “influence and empower” the OECD over its 15-action plan to combat tax avoidance strategies used by multinational companies, says Zara Ritchie, the Melbourne-based leader for global transfer pricing at accountancy firm BDO.
If this happens, “more and more” tax authorities will likely target multinationals over the corporate interest deductions at the center of Chevron’s legal dispute with the Australian Taxation Office, or ATO, adds Daniel Head, the London-based head of U.K. transfer pricing at accountancy firm KPMG.
$2.5 Billion Loan, Untaxed Profits
The Federal Court of Australia appeal ruling last week related to a $2.5 billion inter-company loan that Chevron Australia Holdings Pty. Ltd. received in 2003 to finance a Western Australia gas export project, with the ATO seeking A$340 million ($257 million) in unpaid taxes, interest and penalties.
The inter-company loan to Chevron’s Australian unit should have been made on the same basis as a similar transaction involving independent companies, otherwise known as the arm’s-length principle, under transfer pricing rules which aim to ensure cross-border transactions are priced on a fair basis.
Yet by borrowing at a local rate with just 1.2 percent interest and then lending to the Australian unit at 9 percent, a U.S.-based subsidiary of the Australian unit benefited from Chevron’s group credit rating and subsequently received “significant” untaxed profits, according to the April 21 court ruling.
As part of its anti-avoidance project, the Organization for Economic Cooperation and Development will deliver guidance on the application of the arm’s-length principle to intra-group loans next year.
About A$420 billion in related-party loans were made in Australia in 2014-15, with the energy and resources sector making up almost half the total amount, according to the most recent ATO figures.
Guidance on the arm’s-length principle to intra-group transactions is a remaining part of Actions 8 – 10 of the OECD’s anti-avoidance project against base erosion and profit shifting, known as BEPS. In an April 24 email, a spokesman for the OECD’s transfer pricing team told Bloomberg BNA that work on the arm’s-length guidance is “ongoing,” with publication scheduled for “early in 2018.”
Due to the absence of detailed guidance and the complexity of the litigation process, substantial transfer pricing cases on the arm’s-length principle for intra-group financing are rare, according to BDO’s Ritchie, and this has given importance and influence to any that make it to the courtroom.
Like Chevron in Australia, U.S.-based conglomerate General Electric Co. received a ruling seven years ago in Canada over the arm’s-length principle of inter-company financing. The legal concepts raised in that case are part of the OECD’s existing guidelines for BEPS Actions 8 – 10, Ritchie adds.
“We can expect the OECD's new BEPS-related guidance on pricing of intra-group financing to further endorse” the principles raised in Chevron's case, says Geoff Gill, a Sydney-based transfer pricing partner and economist at accountancy firm Deloitte. “For related party debt arrangements, the implication is that taxpayers need to consider whether the terms of the loan can reasonably be considered to be commercial.”
While last week’s ruling may influence the OECD’s guidance next year, it will equally allow the ATO to publish its own financing arrangements guidance and give the tax authority confidence to pursue cross-border cases, according to Jason Casas, Grant Thornton Australia’s head of transfer pricing.
“The ATO has been waiting for the outcome of this case,” he says about last week's Chevron ruling, which the company may appeal to Australia's highest court. “The decision places greater emphasis on multinational companies to review and assess the commerciality of their related party dealings.”
Following the verdict, an ATO spokesman told Bloomberg BNA the ruling is “significant” and has “direct implications” for similar court cases involving related-party loans. They also noted that the Chevron case is the first in Australia to test the ATO's transfer pricing rules on intra-group transactions.
Chevron, meanwhile, said in a statement posted on its website following the ruling that it will review the decision “to determine next steps, which may include an appeal to the High Court of Australia.”
Cost of Appeal
Yet Chevron may “think twice” over an appeal due to financial costs, says David Sayers, a Milton Keynes-based international tax partner and transfer pricing specialist at accountancy firm Mazars.
The ruling is going to have multinational companies “looking over their shoulder,” and “not just in Australia,” he adds on the impacts of the case. “Transfer pricing advisers who are benchmarking loans are really going to have to change their approach when it comes to using credit ratings.”
Chevron in Oz
Chevron is one of Australia’s largest resources investors, mainly due to an $88 billion spending spree on its Gorgon and Wheatstone LNG developments in Western Australia. It also holds a 16 percent stake in the state’s North West Shelf project, which started shipping liquefied natural gas in 1989.