The debate regarding tax reform continues to dominate politics in Australia, with a number of alternative reforms being canvassed.
Of most relevance to business is the continued push to reduce the corporate income tax rate, with a rate of 25% having been mooted. In addition, the rate of GST and its scope continues to be hotly debated. One of the more interesting proposals for expanding the GST base is the suggestion that a modified version of the tax (referred to as the supplementary financial tax) be applied to certain financial services.
The Federal Court has handed down its decision in Chevron Australia Holdings Pty Ltd v Commissioner of Taxation. At issue in the case was the application of Australia's transfer pricing laws, as modified by Australia's double tax treaty obligations, to a related party loan. The decision is one of the first in the world regarding such a loan and the outcome of the case is being carefully reviewed both in Australia and abroad.
The case related to the 2004 – 2008 tax years, which meant Australia's now-superseded transfer pricing provisions applied. However, the Court's approach to assessing the arm's-length nature of the loan provides guidance on how the courts may approach the current transfer pricing rules. In its decision, the Court held that the conditions that operated between Chevron Australia Holdings Pty Ltd (CAHPL) and its wholly-owned subsidiary (ChevronTexaco Funding Corporation) differed from those that could be reasonably expected to operate between independent parties. In doing so, the Court considered not only the interest rate that applied to the loan, but the other types of consideration that could be provided between independent parties. Based on the evidence in the case, it was decided that no independent party would have provided a loan of the same quantum to CAHPL without the loan being secured and financial and operational covenants being provided. Therefore, the Court considered that these conditions resulted in the interest rate being higher than it otherwise would have been. The Court did not go so far as to 'reconstruct' the dealings between the companies, but held that a number of the conditions were open to be challenged under the transfer pricing provisions, including the currency of the loan (although it ultimately decided the currency may have been arm's-length in this case).
The Court also considered what characteristics of the related parties should be taken into account in determining the conditions that could reasonably be expected to operate between independent parties. The Court held that characteristics that go to the risk profile of the entity, such as the industry in which they operate, must be taken into account. Also, where the company is part of a multinational group, such relationships are not to be disregarded. That is, in determining what could reasonably be expected, the Court may have regard to the fact that CAHPL was a subsidiary of Chevron Corporation. Although in this particular case the Court was unpersuaded that this would make a material difference to the conditions that could be expected to operate, there may be instances in the future where this will be important to the outcome.
In general, the Court was dismissive of much of the transfer pricing and expert evidence provided in relation to the arm's-length nature of the loan. The Court preferred to consider the matter from the perspective of a commercial lender and in doing so stated that much of the evidence surrounding credit rating in this case was unhelpful in determining what constituted arm's-length. Given the predominant methodology for transfer pricing on a loan is based upon the credit rating of the borrower, it is unclear how the case affects the appropriateness of impacts upon existing arrangements.
We understand that CAHPL has lodged an appeal, which is unsurprising given the large amount at stake (approximately A$270 million ($194 million)) and the precedential nature of the case.
The Tax and Superannuation Laws Amendment (2015 Measures No 4) Act 2015 received royal assent on October 13 2015. Most relevantly, the Act amends the scrip-for-scrip provisions to introduce further integrity measures regarding the application of the significant and common stakeholder tests (which can impact upon the cost base of shares) as well as rules regarding how debts of the group are treated on a scrip-for-scrip transaction. As a result of the amendments, future scrip-for-scrip transactions will need to carefully consider the funding arrangements to ensure that no adverse tax consequences arise as a result.
The Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015 was passed by both houses of Parliament on December 3 2015 and now awaits royal assent. The Bill contains the new Multinational Anti-Avoidance Law (MAAL) which broadens Australia's general anti-avoidance rules to target large entities that structure their operations is a manner so as to avoid creating a taxable presence in Australia. In addition, the Bill contains country-by-country reporting requirements consistent with OECD policy and increased penalties for large entities that enter into schemes for the purpose of obtaining tax benefits. The measures apply from January 1 2016.
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