Talking Tax – Issue 12

This week we’re talking tax about…

Case law

Chevron Australia Holdings Pty Ltd v Commissioner of Taxation (No 4) [2015] FCA 1092

The Federal Court has handed down its decision in this important case relating to transfer pricing legislation and the application of the ‘arm’s length’ rule. This case is the first time an Australian court has considered the transfer pricing legislation in the context of finance.

The case deals with a Credit Facility Agreement (Loan) by Chevron Funding Corporation (CFC) to Chevron Australia Holdings Pty Ltd (CAHPL). CFC is a wholly-owned subsidiary of CAHPL, and is based in Delaware.

CAHPL borrowed the Australian equivalent of USD2.5 billion from CFC, at an interest rate comprising the monthly AUD LIBOR interest rate plus a mark-up of 4.14% per annum (about 9%). Relevantly, CAHPL offered no guarantee or security to CFC for the Loan and the Loan was not subject to any financial covenants.

The ATO made determinations that during the 2004 to 2008 tax years, CFC and CAHPL had breached the transfer pricing rules found in Division 13 of the Income Tax Assessment Act 1936 and Subdivision 815-A of the Income Tax Assessment Act 1997. The ATO issued amended assessments, including penalties, for each of those years.

The Federal Court decided in favour of the ATO, saying the Loan breached the transfer pricing legislation because it was not made at arm’s length. The Federal Court said an arm’s length loan in the circumstances would have had a lower interest rate than that charged by CFC, and would have included some form of security or covenants.

During the case, the Federal Court rejected the evidence of a number of experts about arm’s length consideration on the basis that the witnesses either did not address the correct question, that the question put to the witness had not been formulated correctly, that the witness did not have relevant experience or because it was discovered that the witness had previously given advice which was contrary to their evidence in this case.

After rejecting the majority of CAHPL’s evidence, the Federal Court then concluded that CAHPL had failed to discharge its onus of proving that the ATO’s assessments were excessive.

ATO updates

Guidance on website costs

The ATO has released guidance for businesses on claiming website costs. The guidance covers claiming costs for:

• business start up – claiming the cost over 5 years, once the business starts; and
• after a business has commenced – small business can use the simplified depreciation rules, and claim an outright deduction in the year the expense is incurred.

The ATO says it is developing a public ruling on the deductibility of website development costs, and is consulting with tax and industry representatives to discuss issues and scope of the ruling.

We have experience assisting start-ups in a range of industries. If you have any questions about deductibility of start-up costs, please contact our team.

Legislation and government policy

China–Australia FTA implementation Bills

Two bills giving effect to the China–Australia Free Trade Agreement have passed through parliament without amendment and await assent.

In summary:

• The Customs Amendment (China-Australia Free Trade Agreement Implementation) Bill 2015 amends the Customs Act 1901 to provide preferential rates of duty for Chinese originating goods and impose obligations on exporters and producers of Australian goods.
• The Customs Tariff Amendment (China-Australia Free Trade Agreement Implementation) Bill 2015 provides free rates of customs duty for most goods that are Chinese originating goods.

Multinational tax avoidance Bill – Senate Committee recommends legislation be passed

A Senate committee has recommended that the Senate pass the Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015.  In summary, the Bill:

• amends the Income Tax Assessment Act 1997 (Cth) to include a standard and centralised set of concepts that can be used to determine whether an entity is a ‘significant global entity’;
• amends the anti-avoidance provisions in the Income Tax Assessment Act 1936 (Cth) to introduce the multinational anti-avoidance law, which is designed to counter the erosion of the Australian tax base by multinational entities using artificial or contrived arrangements to avoid the attribution of business profit to Australia through a taxable presence in Australia;
• amends the Taxation Administration Act 1953 (Cth) to double the penalties imposed on significant global entities that enter into tax avoidance or profit shifting schemes (without a reasonably arguable position); and
• implements Action 13 of the G20 and the Organisation for Economic Cooperation and Development’s (OECD) Action Plan on Base Erosion and Profit Shifting, which concerns transfer pricing documentation and Country-by-Country reporting, into Australian law.

The Senate Committee considered that the provisions of the Bill strike the right balance between addressing tax avoidance and not placing excessive compliance burdens on business, particularly small and medium enterprises. It was also satisfied that the measures are consistent with the G20/OECD proposals.