Chevron Australia – Full Court of Federal Court of Australia finds that a cross-border loan made on arm’s length terms would have benefited from a parent guarantee or other security

The U.S. subsidiary (“CFC”) of an Australian company (“CAHPL”) in the Chevron multinational group borrowed in the U.S. commercial paper market at a borrowing cost of about 1.2% with the benefit of a guarantee from their ultimate U.S. parent, and on-lent U.S.$2.45 billion of such funds under an unsecured Australian-dollar credit facility to CAHPL at about a 9% interest rate. CAHPL deducted such interest in computing its income for Australian purposes, and received tax-free dividends from CFC of most of CFC’s profits (based on the 7.8% spread). The Australian Commissioners initially denied much of CAHPL’s interest deductions under a somewhat primitive Australian domestic pricing rule, and then later issued replacement assessments for three of the tax years based on a subsequent enactment which retroactively established an ability to assess where there was transfer pricing contrary to the Associated Enterprises Article of the relevant Treaty (here, Art. 9 of the Australia-U.S. Convention).

CAHPL’s appeal was dismissed. In his concurring reasons, Allsop CJ stated respecting the assimilated Art. 9 rule:

[W]ere CAHPL seeking to borrow for five years on an unsecured basis with no financial or operational covenants from an independent lender, in order to act rationally and commercially and conformably with the interests of the Chevron group to obtain external funding at the lowest possible cost consistently with any relevant operational considerations, it would do so with Chevron providing a parent company guarantee, if such were available.

In the light of the evidence as to Chevron’s policy concerning external funding and its willingness to provide a guarantee to achieve that end the above is the natural and commercially rational comparative analysis when one removes the controlled conditions operating between CAHPL and CFC and replaces them with the condition of mutual independence.

In the circumstances there would have been a borrowing cost conformable with Chevron’s AA rating, which, on the evidence, would have been significantly below 9%.

Neal Armstrong. Summaries of Chevron Australia Holdings Pty Ltd v Commissioner of Taxation [2017] FCAFC 62 under s. 247(2) and Treaties, Art. 9.