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Chevron loses appeal against $260 million Australia tax bill

22 April 2017

Chevron Australia could be forced to pay more than $300 million to the tax office after it lost an appeal to the full Federal Court challenging assessments over five financial years from 2004 to 2008.

The court found the company had reduced its Australian tax debt through 9 percent tax-deductible interest payments on a $2.5 billion loan from US -based subsidiary Chevron Texaco Funding Corp.

"We will review the decision to determine next steps, which may include an appeal to the High Court of Australia", he said. The parent company registered in a lower-taxing jurisdiction, DE in Chevron's case, lends money to a subsidiary in a higher-taxing jurisdiction, such as Australia, at above-market rates of interest.

At issue is whether the terms of the loan were at arm's length, which is required under transfer pricing laws.

The interest, as income in the hands of Chevron Texaco Funding, wasn't taxed in Australia or the USA, he said.

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According to the appeal ruling, Chevron Texaco Funding was set up in the lend funds to its Australian parent at about 9% interest from money it raised by issuing commercial paper in the a rate of about 1.2%.

"Multinationals have been using this arrangement to inflate their tax deduction in Australia", Dr Ting said.

"Since 2009, we've paid nearly $4 billion in federal and state taxes and royalties", he said.

"They state clearly that it is necessary when interpreting these technical rules to look at the goal of the provisions as a whole, which includes preventing base erosion, preventing tax minimization", Stewart said.

"The court completely rejected that argument, they didn't provide much discussion, they just say it's clear that the parliament was within power and it's not unconstitutional".

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Chevron admitted in a 2015 Senate hearing on corporate tax avoidance that the current loan, which is under audit by the ATO, could reduce tax payments in Australia by $15 billion. The interest payments were then claimed as deductions in Australia.

'As recognised 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, ' the spokesman told AAP in a statement.

Professor Robert Deutsch, senior tax counsel at The Tax Institute, said the Federal Court verdict was "an important victory for the ATO" that would have "serious implications" for the tax affairs of other multinational companies.

Allsop said that if the loan between the related parties had been independent and at arm's length, Chevron would have provided a guarantee over the loan, securing finance at a rate "significantly below 9%".

The Chevron spokesman said the company "pays a substantial amount of tax in Australia", citing payroll and fringe benefits tax among others, including royalties - which are not a tax but the price paid for resources.

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The ATO will shortly release "detailed guidance to help companies with related party loans comply with Australia's transfer pricing rules".

Chevron loses appeal against $260 million Australia tax bill