The Chevron case is still discussed in many articles around the world. This Chevron article provides more of a technical analysis of the case and even though a long read, it is a good read. It touches on many aspects that should be considered when pricing a cross border related party loan, such as:
- Should the borrower’s credit rating be analysed on a stand-alone basis? Spoiler alert, the case concluded that it should not, but there are countries where the tax authorities would look at the borrower in isolation (just a heads up)
- Should a comparable loan arrangement be exactly the same or is there some flexibility?
- How should the lender be treated in a loan arrangement?
- How much impact does a guarantee have on pricing in a loan arrangement?
- Should the currency be AUD or USD for the loan arrangement? This is interesting and arguably Chevron won this argument as the court agreed to AUD. A USD loan would arguably carry a lower rate which would have made an adjustment easier for the ATO.
There are many different parts playing at the same time and it is important to understand them all to be able to price such transactions. Interestingly, it seems neither the courts nor the ATO have really agreed on what it is that isn’t arm’s length. Or in other words, is this an excessive interest or maybe equity? As mentioned in the last update, this may also not be the end of the road for Chevron and they may appeal to a higher court. I haven’t summarised the case from the article as I couldn’t do it better. If you have any questions, do let me know, I could do a follow up pos to discuss different view points.
I’ll leave it at that, below are some more noteworthy updates from this week, happy reading.
“Chevron, ExxonMobil, BHP Billiton, BP, Shell and Woodside Energy executives are to be grilled under oath about their company tax affairs at a Senate inquiry on Friday [28 April 2017] amid intense focus on the oil and gas industry’s revenue contribution.
Senior Australian Taxation Office figures and representatives of the West Australian government and activist groups Tax Justice Network and GetUp! are also to give evidence to the powerful Senate economics reference committee, which is probing corporate tax avoidance in Australia…”
There was a similar Senate inquiry with BHP before with some interesting questions to which BHP didn’t always have a satisfying answer. I will try find a summary to get to the juicy questions and answers.
“The Indian Supreme Court has upheld an earlier High Court decision that the Formula One World Championship (F1) has a Permanent Establishment (PE) in India and so is liable to be taxed there for the Indian F1 race.
The High Court had previously held that provided the presence of a taxpayer was in a physically defined area, permanence in such a place could be relative to the context of the business. “The taxpayer carried on business in India for the duration of the race, two weeks before it and a week after the race. Consequently, the F1 circuit constitutes a fixed place of business under Article 5(1) of the India-UK tax treaty.”
Also it was held that payments made to F1 were business income and not royalty, as the logos used during the championship were not for intellectual property purposes but for hosting the event…”
The treatment of PEs and the relevant DTAs is always fact specific, but I am sure this opens up some questions over other events, such as cricket world cups in India etc. I wouldn’t be surprised if other countries may even take a similar interpretation to their DTAs for PEs (where the DTA wording is similar). We will also have to wait and see how BEPS Action Point 7 may affect the interpretation going forward.
“Italy enacted into law important changes to its transfer pricing and patent box regime April 24 with the publication of Decree n. 50 in the Official Gazette.
Decree n. 50 replaces the concept of “normal value” with a transfer pricing method that is in line with the OECD’s arm’s length principle, adds corresponding adjustments to Italian tax law, and updates the list of intellectual property that can qualify for the patent box regime…”
The next article may not really be a transfer pricing article, but it will affect cross border related party transactions and I thought it is an interesting take on e-commerce, I just had to share it.
“Austria is seeking ways to make digital services like Alphabet Inc.’s Google or Facebook Inc. pay taxes for transactions with the nation’s internet users, trying to plug gaps in a tax system still designed for brick-and-mortar business.
The most ambitious part of the plan targets the business models of Twitter Inc., Google or Facebook: The tacit pact under which searching, liking, posting and tweeting remains free as long as users let the companies feed usage data into algorithms that help tailor advertising that can be aimed at the most likely buyers.
That arrangement is a form of bartering, and a value-added tax could be imposed on such transactions just as the levies are extended in other parts of the economy, said Andreas Schieder, the parliamentary head of Austrian Chancellor Christian Kern’s Social Democrats, which govern in a coalition with the conservative People’s Party…”
Again, this may not be directly a transfer pricing issue, but if cross border related party transactions are affected, it is likely to affect transfer pricing down the line. For my VAT friends, whenever I see barter transactions mentioned, the red flags are raised as there are certain intricacies to keep in mind for barter transactions from a VAT perspective.