Australia: Flexing Of The Arm's Length Principle In Australia: The Chevron Transfer Pricing Case

Last Updated: 17 February 2016
Article by Stephen Banfield

The Australian Taxation Office (ATO) has recently won a major transfer pricing victory in the decision of Chevron Australia Holdings Pty Ltd v Commissioner of Taxation (No 4) [2015] FCA 1092. This is a decision at first instance by Justice Robertson in the Federal Court of Australia. If this decision is upheld on appeal, it will serve as an important formulation of the manner in which the arm's length principle is to be applied to analyse international dealings involving an Australian counterparty.


The facts of the decision are straightforward. Chevron Australia Holdings Pty Ltd (CAHPL) is an Australian subsidiary of Chevron Corporation (CVX) which is a well-known American multinational oil and gas major. In 2003, CAHPL entered into a Credit Financing Facility to borrow the Australian dollar equivalent of USD2.5 billion from Chevron Texaco Funding Corporation (CFC). CFC was established as a US subsidiary of CAHPL, and sourced the funds to provide the loan from the US debt markets at a much lower cost. The main features of the loan were as follows:

  • Five year tenor, with capacity for early repayment, or provision for extension in certain circumstances.
  • Non-amortising.
  • Interest payable monthly at the rate of AUD-LIBOR-BBA plus 4.14%. This worked out to be an effective rate of approximately 9%. CAHPL obtained a private ruling from the ATO concerning the application of an exemption from Australian interest withholding tax.
  • Unsecured, with there being no parent guarantee provided by CVX.

CAHPL used the funds drawn down under the loan to retire existing debt that it was carrying in relation to the earlier acquisition of Texaco's Australian assets. It also used funds to assist in the further development of upstream assets in the North West shelf, including its participation in the Gorgon gas project (which at that stage had not reached final investment decision).

The interest rate under the loan was determined by CVX's global treasury based in the US in consultation with advice provided by two investment banks. Post draw-down, CAHPL's gearing was 47% of gross assets. An important part of the funding structure was a tax arbitrage that resulted from the payment of the interest by CAHPL. The interest income received by CFC from CAHPL was not subject to US income tax, and given the lower cost of funding incurred by CFC in sourcing funds from the US capital markets, it was able to derive significant profits. These were distributed back to CAHPL in the form of dividends which were non-assessable income for Australian tax purposes. It was admitted by CAHPL that its capacity to make interest repayments under the loan depended in part on recurrent distributions from CFC.

In April 2010, the ATO issued assessments against CAHPL for the 2004 to 2008 tax years denying a portion the interest expenses incurred by CAHPL under the credit facility. These assessments were made on the basis of determinations made under Australia's former transfer pricing provisions within Division 13 of the Income Tax Assessment Act 1936 (ITAA36).

In late 2012, Australia's transfer pricing legislation was amended with the inclusion of Subdivision 815-A of the Income Tax Assessment Act 1997 (ITAA97). Subdivision 815-A was an interim measure designed to give effect to the ATO's longstanding position that it was able to make a transfer pricing adjustment under Article 9 of Australia's network of double tax agreements. The language of Article 9 – the attribution of profits between associated entities – gives a broader basis to adjust an international dealing between related parties than Division 13 of the ITAA36 which looks at each transaction in isolation. The ATO argued the application of a profit-based method in the earlier SNF case1  and lost. Subdivision 815-A was introduced in 2012 but was given retrospective effect to income years starting after 1 July 2004.

With this new transfer pricing weapon in their arsenal, the ATO issued amended assessments against CAHPL under Subdivision 815-A of the ITAA97 for the 2006 to 2008 income years. The constitutional validity of the retrospective operation of Subdivision 815-A was challenged by CAHPL. These were given short thrift by the Court and are not discussed in further detail in this summary. Arguments were also made that the assessments were not validly made by the ATO but this suggestion was also quickly dispatched by the Court, and are not considered further below.


The decision of the Federal Court is extensive. Much of the analysis is a summary of the expert evidence that was led by both parties. The Court ultimately found much of this expert evidence to be unhelpful in analysing the application of Division 13 and Subdivision 815-A to the specific facts and circumstances of the credit facility.

Part of the expert evidence provided by CAHPL included a discussion of the financing of two upstream oil and gas players in the US. This evidence was intended to demonstrate to the Court that oil and gas companies do raise finance from third party creditors through the issue of debt which is barely investment grade (and sometimes not even). This evidence was ostensibly provided to help to overcome the lack of a comparable uncontrolled transaction in the market. And this was part of the problem for CAHPL – it was admitted by their bankers at the time of entering into the credit facility that an Australian oil and gas company with the same profile as CAHPL could not place that much debt and on those terms with third party creditors. The tenor and the lack of security meant that this debt would be an unappealing proposition to third party creditors. It was noted by one expert, and accepted by the Court, that no single third party creditor would provide the whole sum and instead the debt financing would take the form of a syndicated loan with up to 75 to 100 lenders. The Court gave no weight whatsoever to expert evidence supporting the categorisation of CAHPL as having a BB+ credit rating. It was accepted by the Court that creditors in these circumstances would perform their own creditor analysis which is independent of the rating that may be given by a third party ratings agency.

The central question considered by the Court in analysing the application of Division 13 and Subdivision 815-A was the construction of the hypothetical against which a transfer pricing adjustment is made. What features of the international dealing may be recast in forming this hypothetical arm's length transaction? Is it merely the interest rate determined within the context of the other features of the loan which is to be considered, or it is appropriate for a loan with substantially different features to be used as the hypothetical transaction? The Court resolved this question by stating at paragraph 76:

‘What is required, in my opinion, is to depersonalise the agreement to acquire so as to make it, hypothetically, between independent parties dealing at arm's length, but not so as to alter the property acquired. Division 13 of the ITAA 1936 does not, in my opinion, require or authorise the creation of an agreement with terms different from those of the actual agreement, other than the consideration.’

The Court held that the 'consideration' of the loan was more than merely the interest payable, and included the totality of the promises given by the borrower under the transaction. The Court held that in an arm's length transaction, security and other operational and financial covenants would have been provided as part of the consideration given by the borrower. Factoring in these amendments only to the terms of the loan in establishing a hypothetical, it was held by the Court that the adjustments made by the ATO were not excessive.

Consistent with their reasoning, the Court rejected any suggestion that the hypothetical loan should be denominated in USD which would have had a lower funding cost. The Court accepted the suggestion that there was an implicit parental guarantee provided by CVX to support the obligations of CAHPL under the loan, but did not consider that this would have had any impact on the pricing given it was not legally enforceable.


This decision is a significant win for the ATO at first instance. If it is upheld on appeal, it will break what has otherwise been a losing streak for the ATO with transfer pricing litigation. Transfer pricing arrangements amongst international resources players are currently the subject of close scrutiny in Australia, and have been swept up in the public debate about ensuring that multinationals pay their 'fair share of tax'. This debate is becoming more fevered as the investment cycle of the local resources boom comes to an end, commodity prices come off the boil, and Australia remains in fiscal deficit. The more immediate and targeted focus is upon offshore marketing hubs2, but intra-group debt arrangements are as equally low-hanging fruit.

Unlike other items of the BEPS action plan, introducing a more stringent approach to transfer pricing is arguably much easier to implement compared to initiatives such as diverted profits taxes and other measures which require legislative intervention. The typical approach of legislating the arm's length principle within a general transfer pricing provision without further elaboration means that this is by nature an ambulatory concept. It is able to bend and flex as jurisprudence around the arm's length principle develops and changes. It also means that the past transactions can and will be viewed through the prism of a more stringent approach to the pricing of international dealings. The decision of the Court in the Chevron case is not a direct product of the current zeitgeist, but one wonders to what extent this context played a part in the vigor with which this was pursued by the ATO and the willingness of the Court to reject the relevance the comparable transactions which were offered up by the taxpayer.

It would seem that one of the only ways to provide absolute certainty going forward for higher value transactions is to engage with tax authorities and obtain an advanced pricing agreement (APA), as time consuming and expensive as this can be. A unilateral APA in the country of greatest transfer pricing risk would be the simplest version, though potentially not as useful as the more comprehensive approach of applying for a bilateral APA. For lower value transactions, selecting a conservative pricing position that is supported by a profit-based pricing methodology may be a pragmatic way forward.


1 SNF (Australia) Pty Ltd v Commissioner of Taxation [2010] FCA 635

2 Offshore marketing/trading hubs based in Singapore and Hong Kong are under close examination at the moment. This is due to the imposition of little or no taxation imposed on trading gains in these jurisdictions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.