All of these payments are now subject to ATO scrutiny, and if the High Court confirms the decision after the inevitable appeal then the effects will work their way through all multinational financing deals.

It's also a critical precedent that will be examined closely around the world.

Tax commissioner Chris Jordan referred to the case before the Senate tax inquiry two years ago: "Not to oversimplify it, basically, there was a borrowing at 2 per cent by the United States parent and an on-lending at 9 per cent," Jordan said.

"As I understand it, there were something like over 30 expert reports. There were 11 barristers in the case. It took years to get up, and, in my view – maybe I am just too simple here – that looked like a pretty straightforward issue."

Chevron Australia set up a US subsidiary which borrowed $US2.5 billion and loaned it to Chevron Australia. In a neat circle, Chevron Australia claimed a tax deduction for an average 9 per cent interest paid to its US subsidiary, which paid no US tax but shipped the profit it made on this cost arrangement back to Chevron Australia as tax-free dividends.

The result, as with most of these related-party finance deals, was double non-taxation. But the scale of the mark-up of the interest rate from 2 per cent to 9 per cent, then repatriating it back to Australia, bordered on the brazen.

It wasn't hard for Justice Alan Robertson to find against Chevron in October 2015, nor for the three Federal Court of Appeal judges on Friday to confirm his ruling. But the arguments here don't just apply to Chevron.


Chevron faced three possible outcomes from its appeal: it could win, and everyone would be happy; it could lose on a technicality; or it could lose and the whole tax landscape would be rewritten.

The outcome is somewhere between the last two alternatives. Chevron's key argument was that under the arms-length principle for transfer pricing, all it had to show was that if an independent party had loaned $US2.5 billion to Chevron Australia with no security, to be paid back in Australian dollars, then the interest rate would have been more than 9 per cent.

The fundamental change is that four Federal Court judges have now ruled that that's a lousy comparison, because Chevron Corporation in the US would always guarantee any loan.

For corporates, it's horrifying

Justice Perran and Justice Pagone offered one ray of light, noting that Chevron Corp might have been justified in charging a fee to Chevron Austrlaia for guaranteeing its loan, but in the event it didn't.

So maybe different paperwork could have got Chevron over the line. This may be a little late for the companies who have funded Australia's latest wave of mega-projects.

Chief Justice Allsop however in a supplementary judgment argued that if Chevron Corp effectively guaranteed the loan, the logical extension of this was that the proper pricing for Chevron Australia's loan was the rate paid by Chevron Corp.

One of the most contested arguments in the OECD's Base Erosion Profit Shifting project has been whether corporations should have a global rate of interest that they claim wherever they operate.


That argument has been battered back, but Chief Justice Allsop's ruling appears to achieve the same result based on existing laws and treaties.

It's a radical re-orientation of transfer pricing practice that will be felt around the world. For corporates, that's horrifying.

The Tax Office began its audit in 2006 and it has taken 11 years to get this far and still faces a probable High Court appeal.

In the mean time the effects of the failed Chevron tax appeal will be immediate, massive and international.