The scheme kicked off in 2003 when Chevron Corp (CVX) Treasury set up a special purpose vehicle known as Chevron Funding Corporation (CFC) in Delaware. This company, wholly owned by Chevron Australia Holdings Pty Ltd (CAHPL) issued $US denominated commercial paper into the US market at rates as low as 1.2 per cent. The initial offerings and rollovers were managed for CFC by another CVX subsidiary. CFC on-lent funds from the commercial paper program to CAHPL.

Interest on the loan in question, says the report, should not be used to finance the distribution of capital created out of a revaluation of assets.

However, the Tax Office case is contained to attacking the margin above the base interest rate as being not at arm's length. It is a transfer-pricing case. The union report says the ATO has failed to challenge the broader issues of tax avoidance for a transaction intended to make a profit at taxpayers' expense – a potential case under Part IVA of the tax laws that requires that the "dominant purpose" of a transaction be commercial rather than tax driven.

It created a US subsidiary of its Australian company in the state of Delaware, a tax haven, and which borrowed $2.45 billion at an initial interest rate of 1.2 per cent and then on-lent the money to an Australian entity at an interest rate of 9 per cent. This structure may have netted Chevron up to $862 million in tax-free dividends during five years.

The ATO is already locked in a landmark lawsuit against Chevron in the Federal Court where it is seeking to retrieve $322 million with penalties. The case alleges Chevron spun out a complex corporate structure for the explicit purpose of avoiding $258 million in Australian taxes between 2004 and 2008.

"The CFC-CAHPL loan was made in several tranches under a Credit Facility Agreement (CFA). However, despite having raised funds in $US, all CFA advances were denominated and repayable in $A," says the report. "The $A interest rate was set at $A-LIBOR plus a margin of 4.14 per cent. Over the term of the loan the effective interest rates ranged from 8.8 per cent to 10.5 per cent. CAHPL claimed tax deductions on the interest it paid to CFC, giving it tax relief at the rate of 30 per cent. These interest payments were exempt from withholding tax."

CFC, says the report, supposedly took the exchange and interest rate risks on the CFA, but made a "substantial and entirely fictitious margin". The $US currency risk remained with CAHPL because it wholly owned CFC. CFC paid interest in $US on its commercial paper program but was not liable for tax on the margin it made. "Instead, it was able to pay its fictional tax-free profit back to CAHPL as a monthly dividend. The dividends were exempt from US withholding tax and were treated as non-assessable, non-exempt income for Australian tax purposes."

That is, no tax was paid in Australia or the US on the dividends declared by CFC and received by CAHPL. The result of these arrangements was that CAHPL claimed a 30 per cent tax relief for the interest paid at rates of up to 10.5 per cent, despite the fact that the net cost of debt was as low as 1.2 per cent.

The annual meeting for the company looms and directors are likely to come under fire for this and other transactions. As is increasingly the case with multinational companies, it appears that the decision-making has been centralised in the global headquarters and Chevron executives in the US are arguably shadow directors of the Australian operations.