On 21 April 2017, the full bench of the Australian Federal Court delivered its judgment to dismiss an appeal seeking to overturn a ruling from the Australian Taxation Office (ATO) that Chevron incorrectly priced an intra-company loan to shift profits offshore and avoid tax on Australian income. The case involved Chevron Australia Holdings Pty. Ltd. (Chevron Australia), which received a high-interest loan in 2003 from its U.S. subsidiary, Chevron Texaco Funding Corp.
The main issue for the AUD 2.5 billion loan was whether the interest rate was at arm's length. The rate paid by Chevron Australia was equal to the one-month interbank rate plus a margin of 4.14% (approximately 9%), while the U.S. sub only paid approximately 1.2% on the funds it raised for the loans in the U.S. through the issuance of commercial paper. A guarantee was provided for the commercial paper, but not for the intra-company loan. In reviewing the arrangement, the ATO found that the 9% rate was far higher than could be justified on an arm's length basis, and issued an assessment in 2010 of approximately AUD 340 million related to excess deductions for the years 2004 to 2008, including penalties and interest. The main argument of Chevron against the ATO assessment was that in determining the arm's length rate, Chevron Australia should be treated as an "orphan" company, separate from the rest of the Chevron group. If treated as such, it was argued that the approximate 9% rate would be appropriate if lending from an independent party given Chevron Australia's claimed weak BB rating.
In its decision, the full Federal Court found in favor of the ATO and upheld a previous Federal Court decision. The Court found that Chevron Australia cannot be treated as a hypothetical orphan in determining what the arm's length rate would be with an independent party, as this would undermine the purpose of substituting as a comparable a real world arm’s length rate that could predictably have been agreed to. Given the facts of the case, including that the Chevron group has a general policy to provide a third party guarantee for external financing, the arm's length rate for the intra-company loan should take into account such a guarantee. As such, the Court upheld the ATO's position and subsequent assessment, and the appeal is dismissed. Chevron may further appeal the decision to the High Court.