The Full Federal Court handed down its judgment in the Chevron case earlier today. Given that the hearing only began in late February, the omens were not good for the taxpayer – it doesn’t take long to write, ‘the taxpayer’s appeal is dismissed,’ although the Court did devote 64 pages to explaining why that was indeed the result. We now wait for the taxpayer’s seemingly inevitable announcement that it will be seeking leave to appeal to the High Court.
While there was much subtlety to the arguments, Chevron largely re-argued the case it had made at first instance:
- the substantive points: the interest rate was arm’s length, the evidence of their experts established this, and if it wasn’t, the judge should have remitted the matter to be re-determined based on the judge’s view about what arm’s length means;
- some procedural points: the ATO’s transfer pricing determinations were defective and the defects were not protected from being challenged, the ATO could not issue amended assessments for the same years under both the old and new transfer pricing rules, and the Div 13 determinations had ceased once the amended assessments under the new law were issued; and
- a constitutional point: the new transfer pricing legislation is unconstitutional because it is retrospective making it both arbitrary and uncontestable.
For its part, the ATO took the unusual position that the original judgment was correct, but for different reasons - the judge should have found the loan in question (and the loan to which it should be compared) was in USD, not AUD, which would mean the interest rate was excessive.
Neither side, it seems, was happy with the judgment of Robertson J - except for the Full Federal Court which often remarks that, 'his Honour correctly ...' interpreted some section, characterised some transaction or applied a provision.
The Full Federal Court unanimously dismissed the taxpayer's appeal. The leading judgment delivered by Pagone J (Perram J agreeing) rejected the taxpayer's arguments about the procedural defects in the ATO's processes and about constitutional invalidity. And the Court did not devote much attention to the ATO's argument about the currency of the actual loan and any hypothetical loan, saying, there was 'no reason' to interfere with the judge's finding that the actual loan was in AUD and any hypothetical loan to which this loan was to be compared should also be in AUD. (The ATO clearly wanted a different conclusion and may view this as a significant loss.)
Instead, most attention in the judgments is directed to the crux of the case - did the Australian company pay an interest rate that was higher than arm's length, as that concept is expressed in Australian domestic law? The judges revisited the main elements of that issue from the earlier judgment - what significance attaches to the fact that the loan was unsecured, what is the significance of the lack of financial and operating covenants, is the comparable fictional borrowing by a stand-alone company, what is the business of this fictional borrower, and so on? The judges agree with the conclusions, and largely support the reasoning of the trial judge.
But the lasting consequence of this case may well be in the way it allows the revenue authority to challenge both the terms of a transaction, as well as its price. In essence, the taxpayer had argued that the ATO was limited to pricing the loan on the terms on which it was made. As Alsop CJ put it,
... one could well accept, without difficulty, that a stand-alone company with CAHPL’s balance sheet which borrowed AUD 2.5 billion unsecured for five years with no operational or financial covenants would pay a significant interest rate, and in all likelihood on the evidence, above 9%... [So] all one would have to do would be to constrain internally the transaction to give the highest price and include or omit terms of the agreement that would never be included or omitted in an arm’s length transaction and which are not driven or dictated by commercial or operational imperatives, as the foundation for assessing an hypothesised arm’s length consideration. Such unrealistic inflexibility would undermine the sensible operation of the Division by a rigid construction of the hypothesis in a shape and form controlled by the taxpayer.
The taxpayer does not, apparently, get to set the terms of the deal so that the price can be supported.
See our Tax Brief for a more detailed examination of the complexities of this case.