"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," a spokesman said.

The ATO claimed Chevron owed roughly $340 million, largely because the terms of the loan allowed the company to make inflated interest deductions and therefore slash its tax bill here.

At issue is whether the terms of the loan were at arm's length, which is required under transfer pricing laws.

The decision has ramifications beyond Chevron, and even the oil and gas sector.

The ATO has flagged concerns about the "tax risk" associated with related-party financing, such as that which Chevron used. It says there was $420 billion worth of related-party loans in 2014-15.

Moreover, interest expense to overseas parties had been increasing "but not at the same rate of increase as related party debt, implying a lower average interest rate being charged on that related party debt".

"Consistent with the decision in Chevron, the commissioner will continue to take issue with arrangements in circumstances where an Australian subsidiary pays rates of interest on related party loans well in excess of what is – or would be – paid on external borrowings by the multinational group, including if the subsidiary had been allowed to obtain debt funding from an unrelated third party," the ATO told a parliamentary inquiry.


Chevron Australia created a US subsidiary in the US state of Delaware called Chevron Funding Corporation (CFC). In 2003, CFC provided an unsecured loan to its Australian parent. CFC borrowed at 1.2 per cent but on-lent the money at 9 per cent, which gave rise to $1.1 billion in profits for CFC between 20014 and 2008.

And those profits were not be taxed either in the US or Australia.

"Thus, operating income that would otherwise have been assessable income was transformed, by the deduction for outbound interest and receipt of inbound non-assessable dividends, into non-assessable income," Chief Justice James Allsop said in his judgement.

"As found by the primary judge... [Chevron Australia's] debt level of USD $2.5 billion was chosen [by Chevron Treasury] because it was the most tax efficient corporate capital structure and gave the best after tax result for the Chevron group".

Had there parties been completely independent of each other, "there would have been a borrowing cost conformable with Chevron's AA rating, which, on the evidence, would have been significantly below 9 per cent," Justice Allsop said.

KPMG tax partner Grant Wardell-Johnson said the judgement would effect transfer pricing analysis here and overseas.

"The court held that in applying the arm's length test for a multinational, one does not postulate that a subsidiary is completely independent of its parent," he said.


"That is you cannot treat it as if it were an orphan. Rather you must take into account the common ownership in determining the appropriate consideration.

"This is a substantial win for the commissioner and many taxpayers will need to review their transfer pricing methodologies."

A Chevron spokesman said the company paid substantial amounts of tax in Australia, including royalties, payroll tax, fringe benefits tax, excise and interest withholding tax.

"Since 2009, we've paid almost $4 billion in federal and state taxes and royalties," he said.

"We are one of Australia's largest investors and employers. In addition to tax payments, Chevron will continue to deliver substantial economic benefits for decades to come."