Chevron Australia Holdings Pty Limited (Chevron) has withdrawn its application for special leave to appeal to the High Court over the ATO’s assessment of $340 million in tax and penalties for interest payments made to related offshore parties, following a settlement with the ATO for an undisclosed sum. 

In summary, the case concerned a related party loan between Chevron and its US subsidiary, with the key issue being whether the terms of the loan were at arm’s length (as required under Australia’s transfer pricing rules).  Chevron sought to challenge Australia’s transfer pricing rules and the appropriate method for establishing an arm’s length interest rate for a related party loan.

The Full Federal Court upheld the ATO’s position in April this year, finding that the terms of the loan exceeded the arm’s length consideration that might reasonably have been expected in an agreement between independent parties dealing with each other at arms’ length.

The withdrawal of the appeal means that the decision is now final.  The ATO’s initial estimates are that the Chevron decision will bring in more than $10 billion of additional revenue over the next 10 years in relation to transfer pricing of related party financing alone.

Although the Chevron decision has created a lot of “buzz” amongst tax practitioners, taxpayers should keep in mind the narrow and specific facts that were in dispute.  Chevron was mainly about the old transfer pricing rules, and involved a scheme where a US parent borrowed externally at approximately 1.2%, and on lent to an Australian group member for 9%, ultimately returning that margin (previously claimed as a deduction in Australia) as profits to Australia with no further tax. Despite its limited application, the ATO has taken principles from the Chevron judgment and is aggressively reviewing the terms of intra-group loans of multinational groups. Taxpayers should review their existing financing arrangements as soon as possible and consider whether they should revise their affairs (especially under the ATO’s new amnesty).

See also Minister for Revenue and Financial Services, the Hon Kelly O'Dwyer MP’s media release dated 18 August 2017.