Tag: Round robin

A round robin type arrangements involve cross-border funding of an foreign  entity or operations by an local entity, where the funds are subsequently provided back to the local entity or a local associate in a manner which purportedly generates tax deductions while not generating corresponding income.

The arrangements essentially involve a movement of funds where a local entity claims income tax deductions for costs of borrowing or obtaining other financial benefits (including satisfaction of liabilities) from an foreign related party. The loan or other financial benefit provided by the foreign party is in substance funded, directly or indirectly, by an investment by the local entity claiming the deductions or a local associate party. The return on the local investment, reflecting the financing costs payable to the related foreign party, comes back in a non-taxable form, for example, as a distribution from an foreign subsidiary.

A round robin arrangement may display some or all of the following features: The local entity claiming the tax deductions is related to the foreign party providing the loan or other financial benefit. The foreign party is an entity resident in a low tax jurisdiction, or is otherwise not taxable in the overseas country on any financing costs payable by the entity claiming the deductions, for example, because it can claim foreign tax credits or tax losses in the overseas country. Use of hybrid entities or instruments such that the financing costs payable to the overseas party which are deducted in the local jurisdiction are not taxable in the relevant foreign jurisdiction, or the financing costs are deducted twice, i.e. once in the local entity and once by the hybrid entity or the hybrid entity’s owners in the foreign jurisdiction. The financing costs payable to the foreign party is not income taxable in local jurisdiction due to controlled foreign company (CFC) provisions. The non-assessable foreign sourced income distributed to the local entity increases its ‘conduit foreign income’ balance so it can distribute unfranked dividends funded from its local profits to its foreign shareholders free of dividend withholding tax. There is no cash transfer of relevant funds and relevant steps are said to be carried out by journal entries. The arrangement achieves an overall advantage to the MNE group only because of the tax benefits.

Australia vs Chevron, 21 April 2017, Federal Court 2017 FCAFC 62

Australia vs Chevron, 21 April 2017, Federal Court 2017 FCAFC 62

This case was about a cross border financing arrangement used by Chevron Australia to reduce it’s taxes – a round robin. 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. The loan increased Chevron Australia’s costs and reduced taxable profits. The 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. Australian Courts ruled in favor of the tax administration and the case was since appealed by Chevron. In April 2017 the Federal Court decided to dismiss Chevron’s appeal. Australia vs Chevron 2017 Federal Court, 2017 FCAFC 62 Following the decision from the Federal Court Chevron Australia issued an appeal to the High ... Continue to full case
Australia vs. Orica Limited, December 2015 Federal Court, FCA 1399; 2015 ATC 20-547.

Australia vs. Orica Limited, December 2015 Federal Court, FCA 1399; 2015 ATC 20-547.

The Orica case involve funding of an overseas entity or operations by an Australian entity, where the funds are subsequently provided back to the Australian entity or its Australian associate in a manner which purportedly generates Australian tax deductions while not generating corresponding Australian assessable income (Free dip). The arrangements essentially involve the “round robin” movement of funds where an entity claims income tax deductions in Australia for costs of borrowing or obtaining other financial benefits (including satisfaction of liabilities) from an overseas party the loan or other financial benefit provided by the overseas party is in substance funded, directly or indirectly, by an investment by the entity claiming the deductions or its Australian associate the return on the Australian investment, reflecting the financing costs payable to the overseas party, comes back to Australia in a non-taxable or concessionally taxed form, for example, as a distribution from an overseas subsidiary which is not assessable under Subdivision 768-A of the Income Tax Assessment Act ... Continue to full case
Australia vs. Chevron Australia Holdings Pty Ltd . October 2015, Federal Court of Australia, case No. 3 and 4

Australia vs. Chevron Australia Holdings Pty Ltd . October 2015, Federal Court of Australia, case No. 3 and 4

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 ... Continue to full case