This week saw the Australian Tax Office (ATO) winning an important battle against the war on multinationals not paying their fair share of tax in Australia. Chevron will have to pay approx. AUD300mil to AUD340mil in taxes, interest and penalties to the ATO. I tried to simplify the case in a few bullet points below (let me know how I did):
- Chevron Corp US borrows money at a low rate
- Chevron Australia borrows money from Chevron Corp US at a high rate
- After costs, Chevron Corp US makes a massive profit from Chevron Australia
- Estimated profit of US$1.73 billion is not taxed in the US or Australia
- The federal court (in Australia) ruled this type of arrangement may not be arm’s length
- The federal court upheld the decision in favour of the ATO
Interestingly, the ATO said the Chevron victory had direct implications for a number of cases the ATO is currently pursuing in relation to related party loans, as well as indirect implications for other transfer pricing cases. So this is not the last of it for other MNEs in Australia. I have a feeling that other tax authorities will start looking into these type of arrangements closer as well. However, before we get too carried away with this judgment, Chevron can still take this to the high court.
Visit the following two articles if you would like to find out more:
As always, I hope you enjoy the blog this week.
“The IRS has identified a potential inter-company debt issue in a transfer pricing case against electrical equipment manufacturer Eaton Corp.The new issue involves an increase in Eaton’s income for 2007-10 under tax code Sections 951(a)(1)(B) and 956, according to a filing from both parties in the U.S. Tax Court. The increase “arises from additional U.S. property in the form of loans” to a U.S. person by a controlled foreign corporation (CFC), the parties said, citing Section 956(c)(1)(C).
The Internal Revenue Service and Eaton said they have discussed discovery and stipulations for the issue, and the agency is considering making a motion to amend its answer in the case. Eaton will likely object to the new issue, the March 13 status report said (Eaton Corp. v. Commissioner, T.C., No. 028040-14, status report filed 3/13/17 ).
The parties must first resolve whether the earnings and profits (E&P) of the CFCs at issue increased as a result of Eaton’s transferred intangibles, they said…”
The timing of these audits is always interesting. As you can see this is still in very early stages and time will tell what is really going on. I’ll keep you posted.
“A surge in royalty outflow has prompted the government to set up an inter-ministerial group to analyse payment norms and see whether there is excessive payout by Indian companies to foreign collaborators…”
I just hope that this won’t go against the BEPS initiative and arm’s length principle. There obviously may be merit, but if it is going too far it will just complicate the whole thing. Again, lets wait and see what comes out of this ministerial group.
Denmark: Fine calculation in cases on missing or incomplete transfer pricing-documentation (Lexology)
“…Two new rulings, one from a district court and one from the Eastern High Court, give the impression that fines in cases regarding transfer pricing-documentation could be considerably smaller than previously thought. The rulings are the two first on fines for faulty TP-documentation…”
Click on the heading for the detailed discussion on the two rulings.