The Australien Chevron case was about a $US 2.5 billion intercompany loan between Chevron Australia and its US subsidiary, Chevron Texaco, and whether the interest paid on the loan by Chevron Australia exceeded the arm’s length price.
Chevron Australia had set up a company in the US, Chevron Texaco Funding Corporation, which borrowed money in US dollars at an interest rate of 1.2% and then made an Australian dollar loan at 8.9% to the Australian parent company. This 8,9% interest increased Chevron Australia’s costs, and reduced taxable profits.
These interest payments, which was not taxed in the US, came back to Australia in the form of tax free dividends.
The US company was just a shell created for the sole purpose of raising funds in the commercial paper market and then lending those funds to the Australian company.
Chevron argued that the 8,9% interest rate was taking into account the risk of raising loans written in US dollars and then turning that into an Australian dollar loan.
The Court ruled in favor of the tax administration and the case has since been appealed by Chevron.
The ruling was based on the following arguments:
- The interest rate applied to the intra-group financial transaction was high because there was no security and no financial or operational covenants.
- Under similar conditions, an independent entity would have been required to provide security and subject to financial or operational covenants
- Hence, at arm’s length the applicable interest rate would have been (much) lower.