ATO Says Little Evidence of Multinational Tax Evasion: Even After Chevron

Even after the reported "landmark" decision in Chevron  Australia Holdings Pty Ltd v Commissioner of Taxation [2017] FCAFC 62 handed down last Friday (21 April 2017), where the Full Court of the Federal Court upheld an earlier decision of Justice Robertson in Chevron Australia Holdings Pty Ltd v Commissioner of Taxation (No 4) [2015] FCA 1092 (23 October 2015) in favour of the Australian Tax Office (the ATO) that international oil and gas company Chevron meet a tax bill that could exceed $300 million, the ATO is reported as having  declared:

Background to the Chevron Case

The Chevron Case involved 16 tax appeals, and an application under section 39B of the Judiciary Act 1903 (Cth), relating to the financial years 2004-2008.

The main transaction at the centre of the case was a "Credit Facility Agreement" dated 6 June 2003. Under the agreement the applicant taxpayer (Chevron Australia Holdings Pty Ltd (CAHPL)) borrowed the equivalent in Australian Dollars of 2.5 billion in US dollars from a United States based subsidiary of CAHPL, namely, Chevron/Texaco Funding Corporation (CFC).

The case was said not to involve any general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (Cth) which deals with "schemes to reduce income tax". Neither was the case said to involve any allegation that the Credit Facility Agreement between CAHPL and CFC was a sham. 

What the proceedings did involve, according to Robertson J, in the initial Federal Court decision came under the Income Tax Assessment Act 1936 (Cth) and related to the issue of  "arm’s length consideration" where a taxpayer like CAHPL, has acquired property under an international agreement under the Income Tax Assessment Act 1997 (Cth), the cross-border transfer pricing rules and the transfer pricing rules in Australia’s double tax agreements, particularly the Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion (the United States convention).

In the initial case, Robertson J decided that CAHPL’s challenges to the amended assessments under the Income Tax Assessment Act 1936 (Cth) failed and, in the alternative, that CAHPL’s challenges to the amended assessments under Chapter 4 International aspects of income tax Part 4‑5 General Division 815 (Cross‑border transfer pricing) of the Income Tax Assessment Act 1997 (Cth) failed.

Further, Robertson J held that CAHPL’s challenge to the constitutional validity of Subdivision 815-A (Treaty‑equivalent cross‑border transfer pricing rules ) and in particular sections 815-10 to 815-30  of the Income Tax Assessment Act 1997 (Cth), as introduced by the Tax Laws Amendment (Cross-Border Transfer Pricing) Act (No. 1) 2012 (Cth), when read with section 815-1 of the Income Tax (Transitional Provisions) Act 1997 (Cth), should be dismissed.

Justice Robertson found the penalty to be 25% of the scheme shortfall amount, pursuant to section 284-160(a)(ii) in Schedule 1 to the Taxation Administration Act 1953 (Cth).

Chevron on Appeal

On appeal, the Federal Court full bench has, as indicated above, unanimously dismissed an appeal from Justice Robertson's decision in favour of the ATO, which ruled that Chevron used an intra-company loan as a means of shifting profits offshore and avoiding tax on its Australian income.

Next in the Chevron Case

Both SMH and the ABC report that while the Federal Court Full Bench decision is seen as an important one, it is not likely to be the end of the line for the case and that a High Court Appeal is likely.

Reaction to the Case and the Issue of Multinational Tax Avoidance

Internationally, while the press has reported that the decision in the case has emboldened the ATO to go after other multinationals, the ATO is reported to be taking a more restrained approach having had major technology company Oracle and Credit Suisse in its sights among some major companies that have been fined for breaking overseas tax laws.

In Australia, the ATO view, as reported by the ABC, is that the ATO  thinks there is little proof multinational corporations evading their tax obligations, according to a freedom of information investigation. The ABC quotes the ATO as saying:

The ATO's statement of position is interesting as it follows the Federal Government's crack down on multinational companies avoiding their tax obligations in Australia. It seems to indicate a different level of concern between the Government and the ATO on the issue. Evidenced for example by the recently enacted Diverted Profits Tax Act 2017 (Cth) also known as the "Google tax" which gives the ATO new powers to enforce tax laws on major companies and is expected to raise $100 million in its first year of operation.

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Chevron  Australia Holdings Pty Ltd v Commissioner of Taxation [2017] FCAFC 62 (21 April 2017) and Chevron Australia Holdings Pty Ltd v Commissioner of Taxation (No 4) [2015] FCA 1092 (23 October 2015)

US oil giant Chevron faces $300 million tax bill after ATO court victory (ABC)

Chevron loses Australia's biggest tax case (AFR)

Multinationals tax dispute: Chevron loses appeal, ordered to pay about $300m to ATO (SMH)

'No evidence' of multinational tax evasion despite international investigations, ATO says (ABC)