A recent multi-million dollar tax ruling against oil giant Chevron, if allowed to stand, would have ripple effects across the globe and could deter investment into Australia according to Chevron’s global vice president and chief financial officer Patricia Yarrington.
Upon release of the company’s first-quarter earnings, Ms Yarrington told US investors Chevron was still considering a High Court challenge against a tax bill of more than $300 million issued by the Australian Taxation Office.
A Chevron gas station in Sacramento, California. The court case examined the tax deductibility of a $2.5 billion inter-company loan made from a Chevron subsidiary in Delaware to Chevron Australia. Photo: AP
The Full Federal Court this month unanimously agreed with the ATO that Chevron used a series of loans and related-party payments worth billions of dollars to slash its tax bill.
Ms Yarrington expressed “huge disappointment” over the ruling. She said “the court ruling deviates substantially from recognised international transfer pricing guidelines”.
Chevron’s global vice president and chief financial officer Patricia Yarrington is disappointed with the tax ruling. Photo: Supplied
“I’d say that there’s an awful lot at stake with this ruling, not just for Chevron but for any inter-company lending in Australia and more broadly around the globe, because it fundamentally changes established transfer pricing guidelines and principles,” Ms Yarrington said.
“If the ruling stands, it certainly [is] going to affect any future investment in Australia.”
The ATO has been fiercely battling Chevron in court over unpaid taxes between 2004 and 2008. The case examined the tax deductibility of a $2.5 billion inter-company loan made from a Chevron shell company in Delaware to subsidiary Chevron Australia.
The ATO was able to challenge an unusually high interest rate on the loan. The court held that the Chevron parent company could legally loan itself money, but not at the 9 per cent rate it was charging.
Chevron has been left with a tax bill of more than $300 million plus interest and costs, including those of the ATO, which to date has spent more than $10 million defending its tax assessment against the company.
Ms Yarrington said it was important to “make clear to everybody though that the court’s affirmed that the financing arrangements we had in place are legal. And so the issue that is being litigated here is the appropriate interest rate for a loan between our corporate group [in Delaware] and our Chevron Australia subsidiary”.
She said Chevron was still considering its response. “It’s a fairly lengthy decision, and we’re reviewing our options,” Ms Yarrington said.
“Those options include going forward with an appeal to the High Court of Australia as well as continuing on with discussions with the ATO on possible settlements and any other reasonable resolution to the dispute.”
Ms Yarrington said the courts should treat related parties to a transaction as if they were stand-alone entities.
“The Australian appellate court really failed to do this, so in other words they were making no distinction between the creditworthiness of the Chevron Corporation as an entity versus Chevron Australia as an entity, and therefore no distinction on the relative borrowing costs between those entities,” Ms Yarrington said.
The decision may also have implications for a much larger $42 billion Chevron loan currently in place, which has a similar structure to the loan challenged in the court case.
Chevron admitted in earlier Senate hearings that this larger loan, under audit by the ATO, could reduce corporate income tax payments in Australia by $15 billion. But tax experts say the actual impact could be much larger.
The ATO will be releasing detailed guidance to help companies with related party loans comply with Australia’s transfer pricing rules. In a submission to the Senate inquiry, the ATO said there was about $420 billion in related-party loans across the economy — of which almost a quarter was in the oil and gas sector.