This spring a high level federal court of Australia issued its decision in what has been described as the most significant tax case ever litigated in Australia: Chevron Australia Holdings Pty Ltd v Commissioner of Taxation. The court found that the 9% interest rate charged on a $2.5 billion loan by a U.S. Chevron subsidiary to Chevron Australia was not an “arm’s length” transaction and Chevron had used the intra-group loans as a means of shifting profits offshore and avoiding tax in Australia. The tax, interest, and penalties bill now facing Chevron is estimated to be in excess of $340 million.
The Chevron decision heralds a new compliance approach by the Australian Taxation Office (ATO), which is set out in its Practical Compliance Guideline 2017/D4 coming into effect July 1, 2017. The Guideline applies to any financing arrangement entered into with a related party that is not a resident of Australia, whether the relevant debt funding arrangement is inbound or outbound. It details the ATO’s compliance approach to the taxation outcomes of cross-border financing arrangements entered into between related parties.
Among the information contained in the Guideline is a risk matrix allowing taxpayers to self-assess the level of tax risk associated with their financing arrangement. The Guideline specifically sets forth exemptions, safe harbours, and processes. If your financing arrangement falls outside the specifically-described low risk category you can expect that the Commissioner will monitor, test and/or verify the taxation outcomes of your arrangement. The higher the risk rating, the more likely your arrangement will be reviewed.
The message is clear that it will be essential to have contemporaneous contractual documentation in place to support the outcomes of your self-assessed transfer pricing risk profile by showing that you have taken the ATO’s issued guidance into account. Doing this will significantly lessen the chance of any underpayment determination and/or the chance of any penalties being applied by the ATO if (or when) your cross-border debt financing arrangements are subsequently audited.
Ally Law member firms have departments specializing in finance and taxation. Consult with them to determine the most beneficial transactional structures for your business. For more information about our services in this area, contact us at firstname.lastname@example.org. The complete article by Andrea Wookey and Liz Austin of Ally Law member Kemp Strang.