Getting the right price: Chevron

4 minute read  17.07.2017 Chris Kinsella

MinterEllison’s work on a landmark transfer pricing case is redefining how related party companies do business across international borders.

Key takeouts

  • The Chevron case gives much needed judicial guidance on interpreting how the transfer pricing provisions impact cross-border related-party financing.


  • The learnings from the case have application not just in Australia but also overseas.
  • Transfer pricing disputes are fact and time intensive and they are often won or lost before tax assessments are issued.

The issue: What is "Arm's Length"?

Australia's transfer pricing rules were set up to impose arm's length terms and conditions on related party cross border transactions.

Perhaps surprisingly in the last 30 or so years since Australia has had revised transfer pricing provisions in its tax law there have been very few judicial decisions to test the scope and coverage of those provisions. This is noteworthy when regard is had to the very large and ever increasing levels of cross border related-party trade and financing.

Transfer pricing has never been an exact science so any judicial pronouncements on the subject are keenly reviewed and analysed by taxpayers and their advisors in this area (be they lawyers, accountants, economists or financiers).

The case: Chevron

MinterEllison’s tax controversy team represented the Commissioner of Taxation in Australia in his recent litigation against Chevron Australia Holdings (CAHPL), where the Australian Taxation Office sought to dispute the amount of interest paid by the company’s Australian subsidiary on a large loan from a related US company.

Chevron had borrowed US$2.5bn from the commercial paper market in the United States at an interest rate of approximately 1.2% to fund its share of the development and construction of the Gorgon and Wheatstone oil and gas projects in Western Australia. The US issuer of the commercial paper on-lent at an interest rate of AUD LIBOR plus 4.14% (approximately 9%) to the Australian Chevron company.

An impact of this was to significantly reduce the tax paid by Chevron in Australia, through the tax deduction for interest payments. It also allowed the US Chevron company to profit on the difference between the low borrowing rate of 1.2% and the lending rate of 9% over this period.

In issuing tax assessments for each of the tax years between 2004-2008, the ATO denied a significant proportion of the deductions claimed by Chevron for the loan. In a landmark decision, the Federal Court held the company must pay a tax bill of more than AU$340m and dismissed an appeal that the loan was priced on arm's-length terms. Chevron have sought special leave to appeal to the High Court.

The outcome: A ruling for global business

The case has had deep implications for multinational corporations that engage in cross border financing, both in Australia and overseas. It means companies will need to carefully review the terms and conditions of their related party transactions and work out if they have sufficient evidence to support their position should they be challenged by the ATO.

Companies will need to consider whether they can discharge the onus of proving their borrowings or loans were on arm's-length conditions, for example by finding comparable real world transactions.

There has been considerable interest from overseas jurisdictions in this case, which is likely to set an important precedent for future transfer pricing cases.

To this end, the ATO has reviewed its guidance for businesses about transfer pricing and recently issued a draft practical compliance guideline that sets out factors that the ATO considers when assessing the risks of particular cross border financing arrangements. The ATO warns that ‘related party international dealings may have their transfer pricing reviewed or audited by us, with the possibility of pricing adjustments and penalties. The more significant and broader the scope of a business's international dealings with related parties, the more likely we are to review those dealings.’

As the Federal Treasurer said in April 2017 —

'… Australia now has some of the toughest laws in the world to combat multinational tax avoidance and a special, dedicated taskforce within the ATO is reaping results.'