August 8, 2017
In a major transfer pricing judgment (“the Chevron Case”), the Full Federal Court has unanimously dismissed Chevron Australia’s appeal, finding that its loan arrangement with its related US company, Chevron Texaco Funding Corporation, was not at arm’s length and the Commissioner was justified in denying Chevron Australia’s interest deduction claims.
At the crux of the case was whether interest charged on an unsecured loan between the related parties was at market value. The Court, in finding against the taxpayer, took a broad holistic approach in considering whether the arrangement was at market value. The Court concluded that an independent borrower, in the position of the taxpayer, dealing at arm’s length would have provided security and operational and financial covenants to acquire the loan, which would have in turn reduced the applicable interest rate.
The Full Federal Court’s holistic approach to determining whether an arrangement is at arm’s length may have wide ranging implications for various commercial arrangements, including certain super fund arrangements.
Please do not hesitate to get in touch with Daniel Allison & Associates if you believe this case has potential implications for a commercial arrangement you may be involved in.