The Full Federal Court in Chevron Australia Holdings Pty Ltd v Commissioner of Taxation  FCAFC 62 on April 21, 2017, unanimously upheld the decision of the Commissioner to disallow a deduction claimed by the taxpayer in respect of interest incurred on loans provided to the taxpayer by a related company resident in the United States, on the basis that the interest rate applied to the loans exceeded the arm’s-length rate, and thus the deductions claimed were excessive. This decision highlights the need for all taxpayers to look at the total consideration surrounding cross-border agreements when determining the arm’s-length rate.
The Court held that the requirement that there be arm’s-length consideration requires that you look at the total consideration the taxpayer provides under the cross-border loan agreement, which includes not just the promise to repay principal and interest, but other considerations such as financial covenants, security, and guarantees that would otherwise result in a lower interest rate payable under the terms of the loan.
This analysis enabled the Court to look beyond the simple pricing of the interest payable on the loan based on its actual terms and conditions, and to have regard to whether those other terms and conditions were consistent with what the Court considered an independent party in comparable circumstances would have agreed to.
PwC observation: This decision sends a signal for taxpayers to review their cross-border financing arrangements and to demonstrate a comprehensive narrative of the commercial imperatives and circumstances that support the interest rate applied.