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The Federal Court of Australia has twice found Chevron responsible for shifting profits from Australia to the U.S. using an intra-company loan mechanism. This latest ruling upholds an identical one issued by the Australian Tax Office, which Chevron appealed at the federal court. The verdict may be a harbinger for other big business in Australia who use intra-company loans as a way to lessen their tax burden.
This ruling states that Chevron will have to pay around $340 million in taxes plus expenses to the ATO. The mechanism that the company used consisted of setting up a new U.S-based entity that borrowed $2.5 billion at 1.2 percent interest and then lent the money to the Australian unit of Chevron at an interest rate of 9 percent. The interest payments were then claimed as deductions in Australia.
While $340 million is hardly an earth-shattering amount, according to ABC, the ruling could have an impact on a much larger Chevron loan, worth $42 billion, which has a similar structure to the one used to shift profits. The money is being used for the development of some of Chevron’s gas projects in the Australian continental shelf.
One official from the Australian Tax Justice Network told ABC the implications of the ruling on the $42-billion loan will be immediate: the ATO could ask Chevron to restructure the loan in order to prevent it from again using the mechanism to shift profits and cut its tax bill.
Chevron is among the biggest gas operators in Australia, with the giant Gorgon and Wheatstone LNG projects, which have served to make Australia the world’s top producer of LNG.
The court’s ruling will also have implications for other big businesses operating in Australia. The “arm’s length” concept that the court found inapplicable in the case of Chevron’s loan could be used in other cases that are being investigated by the ATO.
The concept is that intra-company loans involves the stipulation that the terms and conditions don’t exceed “what would be regarded as an arm's length price expected to be incurred between independent parties dealing with each other at arm's length.”
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In the case of Chevron’s loan, the Australian unit of the company reduced its tax burden and the shell company in the U.S. made good profit on the difference in interest rates, but it paid no taxes in the U.S. The judges found the deal was in breach of the transfer pricing stipulations of Australia’s taxation law, and now more companies may become the target of a crackdown on such practices.
By Irina Slav for Oilprice.com
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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.