ATO set for increased audits, debt crackdown

A major win for the ATO in the Full Federal Court last week will boost the confidence of the commissioner in pursuing companies with related party debt, according to one mid-tier firm.

Chevron’s loss of an appeal against the ATO in the Full Federal Court is arguably the “biggest transfer pricing case” won by the ATO, according to BDO.

Last week, the court dismissed an appeal against an ATO ruling that Chevron used an intra-company loan as a means of shifting profits offshore and avoiding tax on its Australian income.

Chevron has been left facing a hefty tax bill in the order of hundreds of millions.

The win is tipped to boost the confidence with which the Commissioner of Taxation, Chris Jordan, pursues other multinational organisations that fund their operations in Australia with significant levels of related party debt.

This is particularly if the interest rates charged do not appear to be commercial, not only in the Australian subsidiary’s context, but also in the context of the whole group.

While the Chevron case is concentrated in the oil and gas industry, BDO believes it is likely that significant number of recent infrastructure projects, and other cases with significant levels of related party debt, will find themselves in the ATO sights.

“We are likely to see the ATO take on the increased number of audits for inbound funding arrangements in the very near future,” said Zara Ritchie, global lead, transfer pricing, BDO.

“The loss of the appeal and the case as a whole highlight the Australian courts’ view that the arm’s length principle can look past the legal agreement and examine the commercial and reasonable behaviour of the parties instead, and tax that conduct.

“This departure from the legal agreements will create significant uncertainty for all multinational corporations with related party transactions in Australia and creates a scenario where a more ‘theoretical’ (albeit potentially more commercial) view of the world is taxed.

“In Chevron’s case, the group’s policy was to borrow externally at the lowest rate possible with a parental guarantee. The departure from this policy in Australia was viewed as uncommercial and irrational for an independent borrower in Chevron’s position.

“This view of focusing on what is commercial is not radically different, however, from the Base Erosion and Profit Shifting (BEPS) enhanced Transfer Pricing Guidance published in recent years by the Organisation of Economic Co-operation and Development (OECD).”

Ms Ritchie said: “The decision of the Full Federal Court in Chevron case may influence and empower the OECD, who is poised to publish BEPS-related guidance on the application of the arm’s length principle to intra-group financing arrangements. If this happens, the Chevron case may arguably become one of the most important transfer pricing related court cases not only in Australia, but also across the globe.”

 

 

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