The Australian Taxation Office has scored as big a win against oil giant Chevron as current laws allow, but it hasn’t managed to close a commonly exploited tax loophole, according to an internationally renowned expert.
“The result is a win-win situation for both the ATO and the Chevron group,” Dr Antony Ting, an Australian academic who has deeply researched the company’s tax structure, told The New Daily.
On Friday, the Federal Court full bench unanimously dismissed an appeal from Chevron, thereby upholding an earlier decision that the oil company was charging itself too high a rate of interest on internal loans.
The court held in an earlier case that the Chevron parent company could legally loan itself money at 5 per cent interest, but not at the 9 per cent rate it was previously charging.
The outcome will mean Chevron must repay more than $340 million to the ATO.
Loans are a common tax avoidance tactic used by multinational companies. The parent company registered in a lower-taxing jurisdiction, Delaware in Chevron’s case, lends money to a subsidiary in a higher-taxing jurisdiction, such as Australia, at above-market rates of interest. The subsidiary claims this interest expense as a deduction against its Australian tax bill, thus diverting profits away from the local taxman.
Friday’s decision will narrow this loophole and reap the Australian government millions of dollars in extra revenue, provided it is not overturned on appeal to the High Court.
The ruling forces Chevron to pay about $340 million in taxes, penalties and interest, as well as substantial legal costs, including those racked up by the ATO.
And the precedent it sets may help the ATO claw back some of the estimated $420 billion worth of internal loans by multinationals in 2014-15.
“Multinationals have been using this arrangement to inflate their tax deduction in Australia,” Dr Ting said.
However, according to the expert, Chevron borrows money at about 1.2 per cent from third parties. So the new 5 per cent cap imposed by the Federal Court, down from 9 per cent, is still far above what it pays in the market.
Dr Ting called for the law to be amended so that the ATO can take the group’s overall financial position into account.
“It would be extremely difficult for the ATO to argue for 1.2 per cent because the current tax law is drafted in such a way as to, in general, respect the internal loan, even though it is arbitrarily created,” he said.
“If the government is determined to deal with these kinds of structures, we need to improve the law.”
Professor Robert Deutsch, senior tax counsel at The Tax Institute, said the Federal Court verdict was “an important victory for the ATO” that would have “serious implications” for the tax affairs of other multinational companies.
“Multinationals should as a matter of urgency review their existing offshore financing arrangements in light of this decision,” Professor Deutsch told The New Daily.
“The decision may yet be appealed to the High Court but there is neither certainty that such an appeal will be made nor, if made, that it would be successful. For the moment all parties should proceed on the basis that the Full Federal Court has provided the final word on this matter.”