The Tax Office said Chevron claimed excessive deductions for a loan. Credit:AP The ATO has been fiercely battling Chevron in court over unpaid taxes between 2004 and 2008. The case examined the tax deductibility of a $2.5 billion inter-company loan made from a Chevron subsidiary in Delaware to Chevron Australia. The Full Federal Court unanimously agreed with the ATO that Chevron used a series of loans and related-party payments worth billions of dollars to slash its tax bill by about $300 million. ATO is 'heartened' by outcome

The agency has to date spent more than $10 million in out-of-pocket expenses in the the Chevron case and was hoping for a win. Tax Commissioner Chris Jordan has been heartened by the Court's decision. Credit:Wayne Taylor The ATO will now be able to challenge other companies with similar transfer pricing arrangements. In 2015, Chevron paid itself $2.2 billion in interest payments; that amount is over half of the $3.9 billion in offshore interest payments to related parties that the ATO reported for the offshore oil and gas industry in its recent submission. KPMG tax partner Grant Wardell-Johnson says the case will have global ramifications. Credit:Daniel Munoz

"We are heartened by the outcome," an ATO spokesman told Fairfax Media. "This is the first matter to reach an Australian court which tests how our transfer pricing rules apply to interest paid on a cross-border related party loan. "In short, the Court did not accept the proposition that the Australian subsidiary group of Chevron should be allowed to claim interest on the basis that its borrowings should be judged under the transfer pricing rules as if it was a standalone 'orphan' company separate from the rest of the Chevron Group." "This is such an important win for the ATO," says Chartered Accountants tax leader Michael Croker. "This decision is significant and has direct implications for a number of cases the ATO is currently pursuing in relation to related party loans, as well as indirect implications for other transfer pricing cases." The ATO noted that Australia's transfer pricing rules have been further strengthened since the years under consideration in the Chevron decision, and there were also tougher domestic laws including the Multinational Anti-Avoidance Law and Diverted Profits Tax.

Labor's Andrew Leigh says debt loopholes need to be closed. Credit:Louise Kennerley Chevron can appeal But a Chevron spokesman signalled this may not be the end of the battle. "Chevron is disappointed [with] today's decision ... We will review the decision to determine next steps, which may include an appeal to the High Court of Australia. "As recognised by the trial court in the dispute, the financing is a legitimate business arrangement and the parties differ only in their assessments of the appropriate interest rate to apply." He said Chevron Australia was one of Australia's largest investors and employers and since 2009 had paid almost $4 billion in federal and state taxes and royalties.

The tax and business community have also been keenly watching the case. "The ATO's win against Chevron should send a strong signal to all multinationals that these blatant tax avoidance schemes will be challenged," said International Transport Workers Federation senior researcher Jason Ward. The union, which represents workers on the offshore LNG projects of WA, has been a vocal critic of Chevron. "With this judgement, Chevron should be forced to change the current $42 billion loan which is already being audited by the ATO. If the current larger scheme is not restructured, Australians will lose billions more in future tax revenue." Global ramifications KPMG tax partner Grant Wardell-Johnson said the case would have global ramifications. Companies could no longer postulate that a subsidiary is completely independent of its parent.

"You cannot treat it as if it were an orphan," he said. "Rather you must take into account the common ownership in determining the appropriate consideration." The Tax Institute's senior tax counsel Robert Deutsch said "multinationals should as a matter of urgency review their existing offshore financing arrangements in light of this decision". "The decision may yet be appealed to the High Court but there is neither certainty that such an appeal will be made nor, if made, that it would be successful," he said. "For the moment all parties should proceed on the basis that the Full Federal Court has provided the final word on this matter." Chartered Accountants tax leader Michael Croker said: "This is such an important win for the ATO and will influence many conversations with other multinational companies." He said the Chevron decision could influence government thinking on the need for further statutory limits on interest deductibility, noting Labor's worldwide gearing ratio policy.

"But there are those who say Australia's resource based economy and substantial infrastructure needs mean we cannot be too proscriptive on interest deductions," he said. "One model is to impose restrictions but allow the Treasurer to authorise higher gearing for nation-building projects." Shadow assistant treasurer, Andrew Leigh, said the decision highlighted the importance of closing debt-shifting loopholes. "For all its hot air, the Turnbull Government has consistently opposed Labor's fair measures to tighten the rules that let multinationals use internal loans to shift profits offshore," Mr Leigh said. Australian Greens finance spokesperson Sarah Hanson-Young said Chevron had fought for almost 15 years against paying its fair share of tax to Australians. "The Chevrons and Adanis of this world do not need, or deserve, handouts from the Australian taxpayer when billions are being ripped out of our school system and our young people are struggling with record cost-of-living expenses". Senate inquiry The Senate inquiry into corporate tax avoidance, which has looked at profit-shifting techniques used by tech giants including Apple, Google and Microsoft will now shift its full focus to the oil and gas industry. New hearings are expected to take place in Perth on April 28.

As outlined by both Chevron and the ATO in the Senate hearing in 2015, the new $42 billion loan, like the smaller $2.5 billion loan in the court case, is a hybrid loan structure. It reduces profits in Australia and makes tax-free interest income in Delaware. The Delaware parent company, which has no office and employees, pays an annual filing fee to the state of Delaware of $US175 and no tax on interest income. Chevron admitted in the Senate hearings that this larger loan, under audit by the ATO, could reduce corporate income tax payments in Australia by $15 billion. But tax experts say the actual impact could be much larger. Loading The ATO will be releasing detailed guidance to help companies with related party loans comply with Australia's transfer pricing rules.