AUSTRALIA: TRANSFER PRICING, INTERCOMPANY FINANCING TRANSACTIONS
A decision by the Federal Court of Australia has key implications for transfer pricing of intercompany financing transactions, as well as implication for other broader intercompany arrangements. The case concerns the transfer pricing implications of an intercompany loan agreement between an Australian taxpayer and its U.S. subsidiary (CFC) and whether the interest paid by the Australian taxpayer to the CFC exceeded an arm’s length price for the borrowing.
The case is: Chevron Australia Holdings Pty Ltd v. Commissioner of Taxation [2015] FCA 1092 (23 October 2015).
SUMMARY
Onus of proof: The ability of a taxpayer to discharge the onus of proof that assessments are excessive is critical. The court found in favour of the Commissioner, given that the taxpayer failed to show the consideration in the credit facility agreement was arm’s length consideration or less than arm’s length consideration. The Commissioner’s approach to raising the assessments was not examined in detail, and the judgment focused on the evidence led by the applicant in determining whether the onus of proof was discharged.
Comparability: When seeking to support transactions as being at arm’s length, comparability is critical. The taxpayer could not show that the comparable uncontrolled prices (CUPs) used to support its position included similar terms and conditions to those of the credit facility transaction in question, and were therefore rejected by the court as not comparable.
Conditions: Subdivision 815-A (which applies retroactively to 1 July 2004) was found to allow a re-assessment of profits by reference to conditions existing between independent parties (in contrast, Division 13 focuses on consideration only).
Implicit support: The case shows that implicit support is a relevant matter to be taken into account when undertaking a transfer pricing analysis of intercompany funding arrangements. The impact that implicit support will have on the credit rating of the borrower is dependent on the facts and circumstances of the case (it was found to have little impact on the stand-alone credit rating of the taxpayer in this case).
Treaty provision: Article 9 of the Australia-United States income tax treaty does not provide a separate taxing power outside of domestic legislation. This is contrary to the long-held view of the Commissioner that the tax treaty itself provides a basis to raise assessments. The impact of this finding is muted, due to the enactment of 815-A and 815-B that effectively incorporated the treaty language into domestic transfer pricing legislation.
Read an October 2015 report prepared by the KPMG member firm in Australia: The Experts and the Statutory Task, the Federal Court opines
