Chevron Australia v. Commissioner of Taxation
One of the most significant transfer pricing cases was held in September and October 2014 in Australia between Chevron Australia Holdings Pty Ltd (Applicant) and the Commissioner of Taxation (Respondent). CUFTanalytics Managing Director, John Hollas, was engaged by the law firm for the Respondent to provide expert reports and testimony for the trial.
Justice Robertson released his decision on October 23, 2015 ruling in favor of the Respondent and several of his conclusions are sure to have global ramifications. A link to the decision is provided here.
Below are a few of the more important conclusions which may have transfer pricing implications for intercompany loans:
1) Implicit support. Justice Robertson concluded that while implicit support may well have an impact on a company's credit rating it had very little impact on pricing.
[604] "While I accept the applicant's submission that one must consider the conditions that one might expect to see between a lender and a borrower who are independent, and are dealing wholly independently with one another, which is the language of Art 9, it by no means follows that where, as here, the entities in question are sister companies, also to be eliminated is the relationship between each of them and their common parent..."
[606] "The applicant's submission that the existence and worth of "implicit support" is a matter of fact remains unaffected. I accept the applicant's submission, that in the absence of a legally binding parental guarantee, implicit credit support had very little, if any, impact on pricing by a lender in the real world. This was the evidence of Mr. Martin and Mr. Gross and the conclusion of an article published in 2014 of which Mr. Hollas was a joint author: "Intercompany Financial Transactions: Factor to Consider in Analysing the Impact of Implicit Parental Support""
2) Other Terms and Conditions. Justice Robertson rejected the applicant's submission that the only issue (or variable for consideration) was the interest rate. Meaning the other terms and conditions of the loan must be considered.
[84] "In my opinion, neither the context provided by s 136AD(3) nor the non-inclusive definition of "consideration" in s 136AA(3) provides a basis for concluding that the word "consideration" is limited, in the case of a loan, to the interest rate. Insofar as the applicant contended otherwise, I reject that submission."
[87] "... In the present case I find that CAHPL did not give security or operational and financial covenants, which would have affected that part of the consideration which was the interest rate: the interest rate was higher in the absence of those promises or covenants. If the property had been acquired under an agreement between independent parties dealing at arm's length with each other, I find that the borrower would have given such security and operational and financial covenants and the interest rate, as a consequence, would have been lower. The limited scope of the consideration given or agreed to be given by CAHPL resulted in the consideration which CAHPL did give, the promise to pay the interest rate, exceeding the arm's length consideration in respect of the acquisition. It follows, on that basis, that the applicant has not shown that the arm's length consideration assessed by the respondent Commissioner was excessive."
3) Currency of the Loan
[583] "As to the currency of a loan, although it is not necessary to my conclusion, I am not persuaded that the condition as to the AUD currency which was operational between CAHPL and CFC differed from the condition as to currency which might have been expected to operate between independent enterprises dealing wholly independently with one another. I accept the applicant's submission in this respect that borrowings in AUD would avoid or limit foreign currency gains and losses. I am not persuaded Professor Boymal's opinion to the contrary."
4) Use and Reliability of Market Data. See Justice Robertson's conclusions in paragraphs [510], [515] and [516] on the unreliability of using average spread data from S&P Capital IQ, paragraph [513] on the non-comparability of Term Loan Bs to the CAHPL loan and paragraph [517] regarding non-comparability of yields over US Treasuries to margins over LIBOR for institutional loans.
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