ATO alleges complex Chevron scheme slashed tax bill by $258m
Australian tax authorities allege multinational oil giant Chevron used a series of loans and related party payments worth billions of dollars to slash its tax bill by up to $258 million.
New documents filed in a long-running dispute in the Federal Court show how Chevron allegedly engaged in a complex scheme to benefit from the tax-free interest on inter-company loans.
Chevron is disputing the tax bill, which could amount to $322 million with penalties.
The claim – now being heard before the Federal Court of NSW – has been described as a landmark case on the issue of profit shifting in Australia.
It comes less than a week after the Senate voted for a parliamentary inquiry into tax avoidance to unpick the increasingly complex web of foreign tax havens used to keep profits out of the clutches of the Tax Office.
The inquiry follows the release of a report by the Tax Justice Network, revealed by Fairfax Media, that claimed almost a third of the nation’s largest companies are paying less than 10¢ in the dollar in corporate tax.
Details have emerged as to how Chevron allegedly restructured its Australian operations before 2008.
The case relates to loans between the company’s US and Australian entities between 2004 and 2008, following a merger with Texaco.
In documents filed with the court in August, the Tax Office claimed senior executives at the company’s US operations approved of loans they knew would only benefit the company for tax purposes.
It says Chevron’s US treasurer Dave Krattebol recommended the Australian subsidiary incur a $2.5 billion debt in 2002 to create “the most tax efficient corporate capital structure”.
It also claims the company created an entity in Delaware – a US tax haven – for the “sole function” of lending money to the Australian subsidiary under the arrangement.
“It had no business activities other than raising funds … for the benefit of [Chevron Australia],” it said.
Chevron has refuted the claims as “constitutionally invalid” and that the interest paid on the loans did not exceed the “arm’s length” rule.
“It is telling that the commissioner’s case depends upon the opinions of individuals who – subject to one exception – have never worked in the oil and gas industry, in Australia or elsewhere, in senior positions,” it said.
A Chevron spokesperson declined to comment on the case but said in a statement it “abides by a stringent code of business ethics under which we comply with all applicable laws and regulations in the countries in which we operate”.
The heads of some of Australia’s biggest companies and foreign nationals are expected face the parliamentary inquiry into tax avoidance, voted in the Senate last week.
The inquiry was moved by Greens leader Christine Milne and supported by Labor, the Palmer United Party and other balance-of-power crossbenchers.
The Greens have said Google, Apple, Amazon and Glencore would be on the witness list, along with economists, academics, the ATO and other government agencies.
The Chevron case is based on a $US2.45 billion loan between the company’s US and Australian operations.
The ATO claims a US-based entity raised the loan at an interest rate of 1.2 per cent. It then allegedly on-lent the money to the Australian entity at an interest rate of 9 per cent.
The process is alleged to have netted Chevron up to $862 million in tax-free dividends over five years.
The ATO slapped the Australian-based company with a $268 million tax bill in 2010 following an audit of its accounts. The company then launched an appeal in 2012 and the case is now being heard before the court.
Legal experts say the case is the first major test of Australia’s transfer pricing laws.
Antony Ting, a senior lecturer in taxation at the University of Sydney, said it was an example of why existing international tax rules were “desperately in need reform”.
He said the case highlighted how the company allegedly used a high interest rate for profit, “effectively eroding the tax base in Australia”.
In its report, the Tax Justice Network estimated up to $80 billion could have been forgone by the taxman over the past decade due to the complex tax-minimisation strategies employed by the biggest 200 stockmarket-listed companies.
Mark Zirnsak, a representative of the Tax Justice Network, said artificial debt loading was a “significant form of tax avoidance globally”.
“This highlights the need for Australia to be part of the work the OECD is doing to address this particular tax dodge.”
The inquiry will be conducted by the Senate Economics References Committee.
An ATO spokeswoman said: “Due to confidentiality provisions in the Tax Administration Act, the ATO cannot comment on any individual’s or entity’s tax affairs.”
The hearing is continuing in the Federal Court.