The Chevron transfer pricing case – the story so far

The Chevron transfer pricing case – the story so far (283 kb)

On 23 October 2015 the Federal Court delivered the long-awaited transfer pricing decision in the Chevron Australia Holdings case [2015] FCA 1092. The ATO won on all the major issues (except the currency of the borrowing), though not on all of the many issues argued in the case. The case and the judgment of Robertson J (over 200 pages) are enormous and it seems likely that there will an appeal by the taxpayer given the amount of tax and penalties at stake. Whatever ultimately happens, the case will have great significance for the debt funding of Australian investments by foreign multinational enterprises in the future. This tax brief discusses the major issues dealt with in the decision. A diagram accompanying this tax brief sets out some of the key facts.

This tax brief has been prepared by Greenwoods & Herbert Smith Freehills, Herbert Smith Freehills and Quantera Global. Contact details are shown at the end of the brief.


Chevron is a well-known oil and gas exploration and production (E&P) multinational of which the parent company is listed and resident in the US. After the Chevron acquisition of the Texaco group in 2000 there was a restructuring of its Australian business unit to refinance existing debt and increase the debt level of the Australian operations to a 47% debt to equity ratio.

As a result, in mid-2003, a Credit Facility Agreement was entered into between the parent of the Australian group CAHPL (resident in Australia and also formed as part of the restructure) and its wholly owned subsidiary CFC, which was resident in the US and was formed to enable the raising of USD2.5 billion in the US commercial paper market. The financing was done in a way which qualified for an interest withholding tax exemption in Australia (for which the ATO provided a private binding ruling). The funds were raised by CFC in USD and advanced for five years to CAHPL in return for a promise to repay the equivalent amount of AUD with interest payable at Australian LIBOR plus 4.14%.

No security was provided by CAHPL nor financial/operational covenants and the advance to CAHPL was not guaranteed by the US parent company, though the parent did guarantee the USD borrowing by CFC. CFC did not hedge the AUD/USD currency risk. CAHPL could at its option repay the loan at any time. The USD funds were raised by CFC at approximately 2% interest and on-lent to CAHPL in AUD at approximately 9% interest.

The profit made by CFC was distributed as a dividend to CAHPL, tax-free under section 23AJ, and CAHPL also made substantial dividend distributions to its US parent during the period of the loan. The judgment says that CFC was not taxable in the US on the interest received though the reason (possibly a check-the-box election in respect of CFC which made it and the loan to CAHPL disappear for US tax purposes) is not given. CAHPL claimed deductions for the interest paid to CFC over the five year term of the loan.

By determinations and assessments issued in 2010 and 2012, relying on Division 13 of the 1936 Act for all years, on Subdivision 815-A of the 1997 Act for some of the years and on the associated enterprises article of the Australia-US 1982 tax treaty, the ATO denied a significant proportion of the interest deductions claimed (the exact amounts are not made clear in the judgment). The ATO applied a 25% penalty on the basis that CAHPL entered into the facility for the sole or dominant purpose of obtaining a “scheme benefit.”


Evidence about the transactions was given by a number of (former) employees of the Chevron group, though not the employee who made the decisions about the amount of the loan and had oversight of the project. The evidence included the advice received from investment banks on the amount that CAHPL could borrow and at what interest rate. Critically, it would appear that Robertson J accepted the evidence from one of the executives involved in the deal that:

  • the higher the interest rate by CAHPL, the higher the cash benefit to CAHPL (because the corresponding dividend from CFC to CAHPL would be tax free to CAHPL);
  • borrowing on the terms in fact adopted was not sustainable without the dividend flows from CFC;
  • accordingly, the terms adopted would be unsustainable between independent parties as there would be no dividends between them; and
  • the effect of CAHPL not granting security, not giving covenants and no parent guarantee for CAHPL’s borrowing all combined to push up the interest rate.

There was a large amount of expert evidence on both sides including supplementary reports replying to claims made by experts on the other side. In total there were 19 expert witnesses (12 for the taxpayer, seven for the ATO) and 45 reports from the experts.

On the taxpayer’s side the judge divided the evidence into a number of areas:

  • two experienced commercial lenders and a former bank regulation official on how such lenders would price the loan;
  • one expert on how credit rating of the loan/lender would have been done by a credit ratings agency;
  • two experts on borrowing practices of oil and gas companies;
  • on the issue of whether the terms of the loan could be recharacterised, for example, to be in USD rather than in AUD, an expert on transfer pricing, a former OECD official on the interpretation of the OECD Transfer Pricing Guidelines, an economist on whether there was a natural hedge for the exchange rate risk, and one accounting expert; and
  • on the issue of whether the associated enterprises article of tax treaties conferred an independent assessing power, one expert on US tax law and a former US treaty negotiator who was involved in the 1982 treaty with Australia.

The ATO experts included an oil and gas industry expert, a banking industry expert, a transfer pricing economist, three ratings experts and an accounting expert. As a whole the judge did not derive a great deal of assistance from this wide range of experts, though he built up some important conclusions from a combination of some of their evidence. The judge’s account of the evidence is very lengthy running to 118 pages with some legal issues considered before the evidence and some after.

The following discussion starts with interpretation of the legislation relied on for the assessments, then considers the transfer pricing issues relating to financing, and finally refers to a number of other issues raised by the taxpayer.

Interpretation of legislation relied on for assessment

The relevant part of Division 13 which was originally enacted in 1982 had two critical elements: that “a taxpayer has acquired property under an international agreement” and that “the taxpayer gave or agreed to give consideration in respect of the acquisition and the amount of that consideration exceeded the arm’s length consideration in respect of the acquisition.” Property was defined to include services which was in turn defined to include “rights, benefits, privileges or facilities … …under an agreement for or in relation to the lending of moneys.”

After noting that in SNF the court had rejected the ATO view that the legislative construct did not require that everything remain the same except that the relationship between the parties was removed and instead adopted a more hypothetical approach to the application of Division 13, Robertson J rejected the taxpayer’s submission that “property” and/or “services” should be read down relevantly only to include an agreement in relation to the lending of moneys and held that the property acquired included the sums actually lent to it. He held that what is required by the Division 13 hypothesis is to depersonalise the agreement so as to make it hypothetically between independent parties dealing at arm’s length but not so as to alter the property acquired. This view has significance in relation to recharacterisation discussed below. The borrower does not, however, have to be viewed as entirely anonymous and takes on many of the actual characteristics of the borrower, in this case as an oil and gas E&P company, which has implications for the interest rate.

So far as consideration is concerned, Robertson J quoted case law on different provisions focussing on stamp and gift duty to the effect that consideration does not have its contractual sense. In particular in the case of a loan and contrary to the taxpayer’s submission, the consideration provided by the borrower is not limited to the interest rate paid. As CAHPL did not give the security and operational and financial covenants which the judge found that independent parties dealing at arm’s length would have provided, the absence of which contributed to the higher interest rate actually paid, the arm’s length consideration used by the ATO meant that its assessment was not excessive.

Robertson J notes that this approach does not amount to recharacterising the transaction, but determining what the arm’s length consideration between independent parties would have been for the property in fact acquired. Later in the judgment he seems to come to a similar conclusion as a factual matter, but he expressly states that this is a separate and additional reason for finding that the taxpayer had not discharged the onus of proof. It is not exactly clear what the distinction is, although it may be that, in the former case, his Honour made specific factual findings in favour of the ATO and in the latter, his Honour determined that the taxpayer had failed to overcome the onus.

Financing issues

Credit rating or commercial lender approach

One of the most important issues in the case is the approach to determining the interest rate. The ATO approach and expert evidence was to the effect that the way to go about this was to first determine the credit rating of CAHPL and the loan itself and then benchmark an arm’s length interest rate or credit spread based on market rates for similarly rated comparable debt arrangements.

Robertson J notes that the rating assigned to the borrower or loan needs to reflect the arm’s length “consideration” under Division 13 or arm’s length “conditions” under Subdivision 815-A.

In the judge’s opinion, the correct approach to determining the borrower’s creditworthiness is from the perspective of a commercial lender and not by reference to how an external credit ratings agency would rate the borrower. As part of their internal credit risk analysis, there was evidence which the Court accepted that relevant lending institutions do not necessarily follow the same approach as credit ratings agencies and do not rely on credit agency ratings in deciding whether and at what price to lend.

One of the (but by no means the only) key differences in the approach to risk rating by banks and ratings agencies is the degree to which the rating reflects a company's stand-alone credit profile, versus the credit profile of the parent, and in particular the financial support that a bank would perceive the parent entity would provide to the subsidiary during periods of distress in the absence of an explicit guarantee. This so-called “implicit support” issue is addressed below.

The judge also found that caution was in fact exercised by ratings agencies issuing ratings moving from a non-investment grade rating (S&P BB+ and below) to an investment grade rating (S&P BBB- and above) because of the weight given to an investment grade rating by the marketplace.

From a practical point of view, the approach to determining the borrower’s creditworthiness from the perspective of a commercial lender is an issue for the Court to decide on expert evidence; however, one wonders how taxpayers are expected to go about this in practice given that banks’ internal credit risk rating processes are not transparent. Oddly, the judge appears to accept (or at least does not reject) the use of credit agency ratings for purposes of identifying comparable debt arrangements, notwithstanding the differences in approach to risk rating.

It is also open to question whether adopting the practice of rating agencies might be acceptable in other circumstances, e.g., situations where the closest comparables are not bank loans but Term Loan Bs or corporate bonds which are generally required to be rated by agencies.

Implicit support of subsidiaries by corporate groups

As noted above, the judgment addressed the issue of the influence of parental affiliation on the creditworthiness of the borrower and therefore the interest rate. The ATO has been a long-time proponent of the parental affiliation or implicit support concept, advocating that parental affiliation can have a material impact on and significantly improve the creditworthiness of the borrower. The ATO made a specific reference to the importance of parental affiliation in a 2010 ruling where it said that “taking account of parental affiliation is consistent with the arm’s length principle embodied in the transfer pricing provisions where, in determining the creditworthiness of a borrower, it is a feature of the market to take account of any affiliation the borrower has”.

In Chevron, the questions as to the relevance and significance of parental affiliation were debated. CAHPL’s counsel submitted that the parental affiliation concept had no application, as the statutory test was to determine the appropriateness of the pricing based on a hypothetical transaction between two separate and independent entities and that therefore the borrower could not have any parental affiliation. By contrast, the Commissioner’s counsel argued that the affiliation between the tested party and its group was fundamental to the interpretation and application of the arm’s length principle.

Robertson J concluded that independent enterprises dealing wholly independently with one another may still be subsidiaries and may still have subsidiaries even if the enterprises are independent of each other. He therefore accepted that there was no legislative warrant for ignoring affiliation between a hypothesised party to a transaction and other members of that party’s group of companies. Robertson J then acknowledged that while implicit support may be relevant when assessing a borrower’s credit rating, its existence and value is a matter of fact. He accepted Chevron’s argument that in the absence of a legally binding parental guarantee, implicit credit support had very little, if any, impact on pricing by a commercial lender in the real world. This view was consistent with the evidence of several expert witnesses for Chevron and the conclusions in an article written by one of the Commissioner’s expert witnesses.

Robertson J’s finding on parental affiliation or implicit support was generally consistent with the findings in the General Electric Capital case in Canada where the concept of implicit support was also confirmed. However, in that case it was contemplated that the implicit support provided by the parent may have been of some value to General Electric Capital Canada (which was issuing commercial paper and unsecured debentures in the Canadian market): this seems to reinforce Robertson J’s conclusion that the value of any implicit support is dependent on the facts. In practice it may turn out that the commercial lender approach applies to loans between related parties, and the credit rating and implicit support issues apply where one member of a group issues public bonds with the support of a parent guarantee.

Two future issues to be considered in this area are:

  • accepting that the task is to remove the relationship between the parties, the issue of parental affiliation may be affected by whether the transaction is between two subsidiaries in a corporate group (in which case the parties’ affiliation with their parent may, depending on the facts and evidence, be relevant), or between a subsidiary and the parent (in which case it would seem necessary to remove the connection between the subsidiary and parent); and
  • whether the issue of parental affiliation can be extended outside a credit scenario, e.g., where two subsidiaries dealing with each other receive functional support from their parent, it would seem relevant, on his Honour’s reasoning, to take such support into account in considering the functions of each subsidiary.

Currency of the loan

An important and fundamental issue in this case, and one which was particularly hard fought, concerned the currency of the Credit Facility Agreement, under which funds were provided by CFC to CAHPL. Had CAHPL borrowed funds in AUD (as it contended), or in USD (as the ATO argued)? It is rare that such a basic factual issue could be in such serious dispute. Because prevailing base USD interest rates in 2003 were much lower than AUD interest rates, the answer to this question was of considerable importance.

The starting point from the ATO’s perspective was that CFC had in fact transferred USD2.5bn, rather than its AUD equivalent. This, the ATO said, was the property acquired. In response, CAHPL led evidence from both its own staff, as well as experts, to the effect that the borrowing had been intended to be, and was in fact, AUD denominated, notwithstanding that CAHPL actually received funds in USD on drawdown. Amongst arguments advanced by CAHPL were concerns in 2003 about the tax implications of foreign exchange gains and losses upon realisation of a USD borrowing, as well as some fear that then fluid tax reform proposals might alternatively lead to mandatory taxation of unrealised foreign exchange gains and losses, on a retranslation basis.

The ATO essentially argued, via expert evidence, that it did not make sense for CAHPL to borrow in AUD, given its facts and circumstances, and in particular because its sales income would be USD denominated. The ATO also pointed to the fact that CFC had borrowed in USD, and passed on those funds to CAHPL.

Robertson J accepted the taxpayer’s submission that borrowing in AUD would avoid or limit foreign currency gains and losses. Accordingly, Robertson J did not accept the ATO’s arguments and expert opinions, and found that there “can be no doubt as to the currency of the Credit Facility, which was in Australian dollars.”

It is clear that CFC borrowed funds in USD. As it on-lent the funds to CAHPL in AUD, CFC bore significant foreign exchange risk at an entity level. The judgment notes that consideration was given as to whether CFC should hedge its risk, but ultimately the decision was made not to hedge. Happily for CFC, it made a foreign exchange gain, rather than a loss, when CAHPL repaid the borrowing on maturity.


One element of the recharacterisation issue, in relation to currency, has been dealt with above. However, the parties were also in heated disagreement as to the ability of the Court to amend the terms of the loan for arm’s length purposes.

Having determined that the property acquired was the rights or benefits granted or conferred under that Credit Facility Agreement, including the sums lent, the judge found, as a matter of fact that if that property had been acquired under an agreement between independent parties dealing at arm’s length with each other, the borrower would have given security and operational and financial covenants and the interest rate, as a consequence, would have been lower.

The taxpayer had contended that any such approach was recharacterisation or reconstruction.  It pointed to a number of factors, such as the OECD Transfer Pricing Guidelines and the reconstruction power in the more recent Subdivision 815-B, in support of its proposition that it was impermissible to rewrite the terms of the loan. Rather, in CAHPL’s submission, it was necessary to keep the terms as they were and just determine the interest rate.

The judge rejected any suggestion that such re-writing of the terms of the Credit Facility Agreement amounted to impermissible recharacterisation. Rather, his Honour focussed on the words of the statute itself (“consideration” in Division 13, “conditions” in Subdivision 815-A) rather than transfer pricing lore. It was not possible to substitute the statutory language with admonitions against not “recharacterising” or not “rewriting”.

This reasoning may give cause to consider the circumstances in which a Court (or the ATO) would need to rely on the recharacterisation power in Subdivision 815-B or under the OECD Guidelines. No doubt there are cases where those provisions can apply beyond what his Honour did, but we would expect this recharacterisation argument is likely to feature in any appeal. However, it is important to recall the finding that the terms of the loan were unsustainable between independent parties. Had that finding not been made, the result may have been very different.

Comparable uncontrolled transactions

The case also highlighted the very high (arguably, unrealistically high) standards of comparability expected by the courts at least as far as the benchmarking of interest rates is concerned in an application of the comparable uncontrolled transactions (CUT) or comparable uncontrolled price (CUP) method.

Robertson J rejected the four loan agreements put forward by the expert witness for the ATO, and also the five loan agreements put forward by the expert witness for Chevron, for reasons such as:

  • the amount of the loans was significantly different to that under review;
  • there was security provided whereas there was none in the CAHPL loan;
  • there were no financial covenants in the CAHPL loan;
  • there was doubt as to whether the CAHPL loan should be benchmarked against senior debt or subordinated debt;
  • the loans were of different tenors; and/or
  • the borrower companies were either in different industries (not E&P, even if they were in the energy industry), or experiencing financial difficulties, or not operating in the Australian market, or were parents rather than subsidiaries.

This inability to identify comparable third party agreements reflects the fact  that the agreement between CAHPL and CFC was drafted in a way that would simply not exist between an independent commercial lender and independent borrower – the lack of financial covenants or security was particularly at issue.

In this case it was always going to be a challenge to benchmark the interest rate using the traditional CUT/CUP approach, due largely to the way that the agreement between CAHPL and CFC was drafted. That was so even though two investment banks were consulted as to pricing by the taxpayer prior to entry into the loan.

However, there are some key learnings to be taken from the conclusions reached by Robertson J in this case:

  • any CUT/CUP search should be carried out using the financial data of the borrower that is or would have been available to an independent lender at the time of negotiation of the tested transaction;
  • in order to identify CUTs/CUPs, the credit risk of the borrower should be assessed in the same/similar way as would be carried out by independent lenders at the time of the making of the loan (although as noted above, the practical aspects of this expectation have not been clarified by Robertson J);
  • credit agency ratings should not always be relied upon for assessing the credit quality of the borrower, although the rating methodology used by the rating agencies may be similar to that which would be applied by an independent lender;
  • whether or not implicit support of a parent exists is a matter of fact and so may be taken into consideration, but in practice such implicit support is likely to have little if any impact in the real world – whether there is any benefit would appear to be a question of fact;
  • if no reasonable CUTs/CUPs are able to be identified from publicly available data, then consideration may be given to the use of alternative methods in the same way that would be done by independent commercial lenders; and
  • loan agreements between related parties should be drafted with the terms that would appear at that time in the real world, as if between an independent borrower and an independent lender (e.g. with clarity on subordination, appropriate financial covenants, security and so on). Without this, it would be very difficult in practice to benchmark the interest rate, given the high standards of comparability that would be expected.

Since no reasonably accurate CUTs/CUPs were able to be identified because of the way that the CAHPL/CFC loan was drafted, the conclusion reached by Robertson J was that Chevron had not “shown that the consideration in the Credit Facility Agreement was the arm’s length consideration or less than the arm’s length consideration nor proved that the amended assessments were excessive”.

Given the very high standard of comparability that was expected in a CUT/CUP analysis by Robertson J, and the burden of proof placed on the shoulders of Chevron by Division 13 and/or Subdivision 815-A, as well as his Honour’s view that the Court was not confined to just adjusting the interest rate to an arm’s length one but could look more broadly at arm’s length terms, the decision against Chevron followed.

Other issues

While pricing the debt was clearly the critical issue, the case involved a plethora of other issues.

Do treaties provide an independent transfer pricing adjustment power?

The ATO partly based its assessments directly on the associated enterprises article in the Australia US tax treaty (Article 9 in most other treaties). The taxpayer contended that it was necessary to find domestic legislation supporting the adjustment to carry out the authority provided by the treaty. This issue was raised but not directly decided in previous transfer pricing cases (SNF and Roche) which were both duly quoted by Robertson J. The judge for the first time in an Australian judicial decision clearly concluded against this ATO view. Three lines of thinking are apparent.

The first is that tax treaties assign taxing rights between states and leave the levy of tax to the domestic law of the state. Robertson J quoted the cases of Lamesa, GE Capital Finance and Chong for this view which tended against the ATO view and also ensured that no problems arise under section 55 of the Constitution which requires that laws imposing with taxation deal only with the imposition of tax. Secondly he quoted the stronger view of Lindgren J in the Undershaft case that tax treaties are exclusively relieving, which was regarded as “squarely against” the ATO view. It is doubtful that Lindgren J’s view is correct in all cases, even though it applies in the US for constitutional and legislative reasons and is ensured by the terms of its treaties on the US side. The third line of thinking was based on the expert evidence that the US does not regard article 9 as imposing tax and that the same should apply symmetrically on the Australian side. The judge did not find it necessary to adopt this line of reasoning to support his conclusion.

Despite the judge’s conclusions, this view did not end up assisting the taxpayer. In this case the issue was raised by the ATO to cover off the event that the Division 13 determinations were held to be procedurally defective so that another ground was necessary to support them. As noted below the taxpayer was unsuccessful in its procedural challenges.

Interpretation of Subdivision 815-A

Apart from constitutional and procedural issues referred to below, the taxpayer mounted a comprehensive challenge to the application of Subdivision 815-A, which, aside from a few matters, was rejected by Robertson J. Because of the large number of the challenges, we set out only some of them in bullet point form with the judge’s response:

  • Because the operation of the article in the US treaty entitled “Associated Enterprises” was affected by the provisions of article 1(2) of the treaty preserving taxpayers’ domestic law rights, it did not “correspond” as required by Subdivision 815-A to the equivalent article in the UK treaty. The judge rejected both the premise that article 1(2) had such a relevant effect and the conclusion that it therefore did not correspond as its “gist” was the same.
  • The article in the US treaty did not apply to CAHPL (because it preserved domestic law rights under article 1(2)), and did not contain “requirements” that applied to it because it was too vague or because article 11 on interest covered the field so far as interest payments as well as receipts are concerned. The judge rejected these generally as giving too extensive a meaning to the application of the requirements of the associated enterprises article, even where the premises of the arguments were correct.
  • The taxpayer did not get a transfer benefit under Subdivision 815-A because the ATO did not spell out all the elements of the alleged benefit in detail, the Division 13 determinations removed the tax benefits, and profits were to be judged overall, including the dividends received by CAHPL from CFC which cancelled out the reduction of profits of CAHPL. The judge considered that it was not necessary for the ATO to spell out the elements explicitly in the way the taxpayer suggested, that Division 13 did remove the benefits but he was considering the matter in the alternative, and that profits did not include the dividends.
  • Division 820 on thin capitalisation was a code on interest deductions, and as the level of debt was within the permissible ratio, the ATO was unable to deny the deductions. This has been a long-contested area between the ATO and taxpayers but the judge held that those rules set limits on the amount of debt and did not deal with the interest rate charged on that debt.


The 2010 determinations and assessments under Division 13 were challenged on the basis that they were signed by one ATO officer who did not have power to make determinations in the name of another ATO officer who did. Based on existing case law including on this kind of issue under Division 13, Robertson J held that the provisions protecting assessments against allegations of procedural defects applied and the assessments were valid, even though the determinations were made by an officer who did not have power to make them.

Similarly, as the 2012 Subdivision 815-A determinations and assessments covered three of the five income years in contention, the taxpayer argued that they effectively discharged the 2010 determinations in relation to the same years. The judge gave short shrift to this argument as there was “nothing in the statutes or the facts which suggests or supports that contention.” Apparently he accepted the ATO view that the 2012 assessments were further amended assessments which simply incorporated and added to the 2010 amended assessments an additional ground based on the 2012 legislation introducing Subdivision 815-A. As noted above the judge upheld the 2012 assessments under Subdivision 815-A but he pointed out that this was in the alternative to upholding the 2010 assessments (that is, accepting that if the 2012 assessments were valid they effectively superseded the 2010 assessments but not the Division 13 determinations which thus also supported the 2012 assessments).

A further objection was made to the 2012 determinations on the basis that they did not disclose a genuine consideration of whether a transfer pricing benefit had been obtained, apparently on the ground that the amount assessed in 2012 was exactly the same as under the Division 13 2010 determinations. The judge dismissed this objection as failing at the evidentiary level – there was nothing to suggest that the ATO issued the determination without any intention of considering the relevant issues. 

Procedural objections used to be very common in transfer pricing cases especially when the ATO became active in the area in the 1990s. After a series of decisions adverse to taxpayers, however, they have become less common. The taxpayer’s attempts to resurrect this kind of argument in this case have gone the same way.

Constitutional issues

The taxpayer also challenged the constitutional validity of Subdivision 815-A. The challenges noted the retrospective nature of the provisions but, in the light of existing case law that this was not a ground of invalidity per se, focused on their also being arbitrary and lacking sufficient certainty. The judge rejected the ground of arbitrariness on the basis that it was referring to morally and not legally arbitrary, and, to the extent that US constitutional case law was invoked, on the ground that the cases had to do with the US Fifth Amendment which has no counterpart in Australian constitutional law. The lack of certainty was partly referred to “nebulous criteria” based on the “vague” OECD Guidelines and a treaty provision, the associated enterprises article, that the judge had held was not self-operating, as noted above. The judge seems to suggest that this mistakes complexity for uncertainty and states that there is no constitutional problem with domestic law provisions referring to treaty related material to guide their interpretation.

Although not a constitutional matter, the judge also dealt with a further challenge that the amending statute failed to amend the relevant taxing act to make the amendment apply to past years. If this challenge were correct, virtually all of Australia’s retrospective tax legislation would suffer the same problem. The judge dismissed this argument.

The taxpayer’s challenges in this area also hark back to the past – in this case almost a century ago when unsuccessful constitutional challenges were mounted to the original 1921 federal provisions on transfer pricing.


By reason of transitional rules for Subdivision 815-A the ATO accepted that a 25% penalty could only apply to assessments based on Division 13 and also that the taxpayer had a reasonably arguable position. This meant that the penalty would be 25% if the taxpayer entered into the scheme “with the sole or dominant purpose of … getting a scheme benefit”, otherwise 10%.

The taxpayer said that the purpose in this case was entirely its subjective dominant purpose which was to refinance existing loans. The ATO pointed to evidence from Chevron employees referring to merger synergy benefits being mainly made up of Australian tax benefits and the urgency of getting the Credit Facility Arrangement in place to meet merger synergy deadlines. He held that while it was the dominant subjective purpose that was relevant, the evaluation exercise was not entirely subjective as the statute contained the familiar language “having regard to relevant matters, it is reasonable to conclude …”. The judge accepted that refinancing could have been done by the taxpayer borrowing at an arm’s length interest rate but it did not do so, which was explained by the dominant purpose to get the scheme benefit. Accordingly, penalties at 25% were imposed.

Implications for transfer pricing adjustments for income years from 2013

For income years commencing on or after 1 July 2013, cases like Chevron are now dealt with under Subdivision 815-B. In that sense the result and reasoning are only directly relevant for past income years to which Division 13 or Subdivision 815-A apply. Nonetheless there are many messages in the judgment for the future of transfer pricing in Australia regardless of the final outcome of any appeal process in the case which may take some years to resolve.

It seems likely that the ATO will assert that Robertson J’s comments, as to the relevance of the lack of security and covenants should also be relevant going forward under Subdivision 815-B, either with or without resort to its reconstruction power. That is, if a related party loan does not provide security and covenants, and it might be expected that such terms would have existed, in comparable circumstances, in a loan between independent parties, the interest rate on the related party loan will need to be set on an assumption that such terms were in fact included.

The various financing issues discussed in Chevron, asconsidered above, can also generally be expected to be relevant in the context of Subdivision 815-B.

Further, the case is important in relation to the use of experts in all future transfer pricing cases and asking them the right questions. One of the main reasons that Robertson J found so little of the evidence to be useful in Chevron, was because the experts had not been asked the right questions in light of the tests in the relevant legislation. This point is easy to make with the benefit of hindsight, but it emphasises again just how much judges will focus on the statutory language in preference to industry lore or the OECD guidelines. The questions to be asked of experts in a Subdivision 815-B context will be different to those required for Division 13 because of the different statutory tests, but great care will still be required in briefing experts in future cases.

Contact Details


Tony Frost
phone +61 2 9225 5982

Richard Vann
phone +61 2 9225 5905

Graeme Cooper
phone +61 2 9225 5905

Julian Pinson
phone +61 2 9225 5994


Toby Eggleston
phone +61 3 9288 1454


Nick Heggart
phone +61 8 9211 7593

Herbert Smith Freehills, Sydney

Hugh Paynter
phone +61 2 9225 5121

Quantera Global

Doug Fone
phone +65 6818 9175

George Condoleon
phone +61 2 8249 1860 

Stean Hainsworth
phone +61 408 768 210



Tony Frost



Professor Richard Vann



Professor Graeme Cooper



Julian Pinson