• Service: Tax, Global Transfer Pricing Services
  • Type: Regulatory update
  • Date: 14/08/2014

Tax Insights

KPMG's analysis of tax issues and developments.

Jeremy Capes

Jeremy Capes
Partner, Tax

+61 2 9335 7873

Chevron Case: the future of intercompany debt pricing and reconstruction? 

by Jeremy Capes, Transfer Pricing Specialist


One of the issues in Chevron Australia Holdings Pty Ltd and the Commissioner of Taxation (No2) [2014] FCA 707, set down for 29 September 2014, is whether the interest paid in respect of USD 2.5bn advanced to the Australian taxpayer by its US subsidiary, exceeded the arm’s length consideration under Division 13 of the Income Tax Assessment Act 1936 (Cth).

The Federal Court recently granted leave to the Commissioner to amend his Appeal Statement in advance of the trial. Whilst Robertson J noted that the proposed amendments add nothing new to the Commissioner’s submission (and therefore allowed them), the arguments themselves are significant.

The Commissioner is arguing, amongst other things, that if the taxpayer had borrowed the funds at arm’s length, it would not have been on the actual terms of the agreement and if arm’s length terms had been adopted, a lower interest rate would have been applied or the principal would have been less (based on two separate arguments).

The arguments in respect of Division 13 are based on the contentious notion that hypothetical arm’s length transactions can be used to price actual transactions. Whilst this is yet to be determined, strong parallels can be drawn to TR 2014/D3 in which the reconstruction of debt is referenced in describing how the Commissioner will likely exercise his reconstruction powers contained in the newly enacted Subdivision 815-B of the Income Assessment Act 1997 (Cth).

Clearly if the Commissioner is successful, this case has implications for prior years under Division 13. Regardless, given the new self-assessment environment and the need to consider if and how section 815-130 applies to the taxpayer (and to document this in the annual contemporaneous documentation), taxpayers need to consider the arm’s length support for the terms, structure and substance of their loans, not just the pricing.


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