Australia lays the foundation of its intra-group financing vision with Chevron case

On April 21st, 2017, the Full Court Federal Court of Australia (FCF) has given a ruling on the deductibility of intercompany interest expense paid by an Australian company (Chevron Australia Holdings Pty Ltd v. Commissioner of Taxation – April 21st, 2017).

In 2003, Chevron Australia Holdings Pty Ltd (CAHPL) borrowed an amount of $2.5 billion from its US subsidiary Chevron Texaco Funding Corporation (CTFC) at an effective rate of approximately 9%.

CTCF raised necessary funds in the market by issuing commercial paper with Chevron Inc guarantees. The FCF held that the interest rate paid by the CAHPL was unusually high considering the absence of:

  • Securities
  • Engagements
  • Guarantees in the intragroup agreement.

In its ruling, the FCF confirms that in a transfer pricing analysis, it is impossible to analyze in isolation an Australian subsidiaries, as if it were not belonging to a group. Nevertheless, mere membership in a group is not sufficient to demonstrate a material impact on its credit score. The implicit support of the group was not approved as having a material impact on CAHPL rating. The FCF held that only an explicit guarantee provided by the group is liable to affect the credit rating of a subsidiary.

The Chevron group appealed against this decision to the High Court of Australia.).