By Bradley Olson and Robb M. Stewart
A contentious tax dispute between Australia and Chevron Corp.
could cost the company billions of dollars and open a new front in
global efforts to crack down on the aggressive tax strategies used
by many multinational corporations.
The case deals with Chevron's practice of financing its
Australian operations by providing loans to its in-country
subsidiary at interest rates much higher than market benchmarks,
even though the company pays less to raise capital. The arrangement
boosts the Australian unit's costs, in turn reducing taxable
profit. In some cases, the difference in rates was almost 7
percentage points, according to reports released as part of a court
case in Australia.
Chevron, which says its tax strategies are legal, last month
lost an appeal of a 2015 ruling in favor of the Australian Taxation
office and said Friday that it is planning an appeal to the
country's highest court.
The case is limited to Chevon's business dealings in Australia,
and means the company owes a tax bill of about $250 million,
including penalties, for the tax years from 2004 to 2008. But the
ruling could cost Chevron far more if the same principles are
applied to the company's massive natural-gas export projects in the
country, which it and several partners have spent more than $80
billion since 2009 to build. Australia's tax office is auditing
Chevron over similar issues during that later period.
Should the same principles apply in more recent years, Chevron's
tax bill could jump by about $150 million to $300 million a year,
according to a Wall Street Journal analysis of company interest
rates in both jurisdictions. Over a decade, that would amount to as
much as $3 billion, although the exact figure would depend on a
number of factors, including oil and natural-gas prices and how
long Chevron takes to repay the loans.
"There's an awful lot at stake with this ruling, not just for
Chevron but for any intercompany lending in Australia and, more
broadly, around the globe," Pat Yarrington, Chevron's chief
financial officer, told investors in a conference call last month.
"If the ruling stands, it's certainly going to affect any future
investment in Australia."
The stakes go beyond Chevron. Regulators in the U.S., European
Union and elsewhere have cracked down on what tax professionals
call an aggressive use of transfer pricing -- setting payments to
subsidiaries for services in order to shift profits to low-tax
jurisdictions and expenses to high-tax areas. Such practices can
save billions of dollars across industries, tax experts say.
But several experts said this was the first tax ruling on this
scale that they could recall involving the interest rates an
international company charged to a subsidiary.
Previous cases, which have involved corporations such as
Coca-Cola Co., Facebook Inc. and Starbucks Corp., centered on how
companies sell assets to subsidiaries or charge them for licensing
fees, royalties or other goods. Those disputes have often hinged on
the value of whatever is being sold to a subsidiary, which can be
hard to determine in the case of unique items such as the formula
for a beverage or another proprietary business matter.
Examining loans and interest charges to subsidiaries could prove
simpler for investigators because of the relative transparency
associated with interest-rate benchmarks, tax professionals
said.
"Interest rates on loans are a prime candidate for
transfer-pricing scrutiny," said Robert Willens, an independent tax
adviser.
Australia's tax office has been aggressive in its scrutiny of
global corporations and is auditing Apple Inc., Google parent
Alphabet Inc. and Microsoft Corp. Those audits have been linked to
where the companies book revenue. Company representatives have said
their tax practices are legal in Australia.
With Chevron, the Australia tax office has zeroed in on the use
of what it believes are higher-than-market interest rates to reduce
in-country profits, as well as the costs of shipping goods, both
items of particular import to Australia's newfound status as a
natural-gas exporting superpower. The U.S. is also weighing limits
to tax benefits from interest payments, according to one of the tax
overhaul packages being considered by Congress.
Australia's tax office is pursuing a number of other cases that
involve how much companies charge their subsidiaries in interest,
often called related-party loans. In the 2014-2015 tax year,
related-party loans in Australia exceeded $300 billion, about half
of which involved resource companies.
Taxation of energy companies has become a political issue in
Australia. The country is closing in on Qatar as the world's
largest natural-gas exporter. Yet natural-gas shortages in some
regions have sparked surging prices and blackouts. And Australia
stands to collect a fraction of the taxes and royalties Qatar
receives from its energy exports, according to an analysis by the
International Transport Workers' Federation, a labor organization
that has targeted the tax strategies of multinational corporations
around the world.
Although Chevron's projects have led to billions of dollars in
payroll and other taxes in Australia, the company isn't projected
to pay any corporate income tax for more than a decade. That's
because the cost of its gas-export projects ballooned as companies
rushed in, then profitability was hit by a crash in gas prices.
Energy consultancy Wood Mackenzie estimates that Chevron's
Gorgon project, one of the biggest gas-export developments in the
world, has a projected rate of return of just 7.7%, down from 12.6%
when the company made its investment decision in 2009.
As a corporation, Chevron pays an interest rate of about 2.25%
on debt of about $32 billion, according to company documents. On
their current debt, the company's Australia-related subsidiaries
pay a rate that is about 2.63% higher than the interbank lending
rate in the country, documents show.
That rate differential, as well as questions over how much the
company pays subsidiaries for certain other services, are at the
center of the current Australia audit, which could take as long as
a decade to resolve.
Michael Fenner, Chevron's taxation manager in Australia, said in
a hearing that its interest-rate arrangements related to loans for
the gas projects were different from those at issue in the
2004-2008 dispute. "I cannot say there is no spillover, but nor can
you say there's a direct correlation in the outcomes either," he
said.
Jeremy Hirschorn, a deputy commissioner at the Australian
Taxation Office, said the recent court ruling upholding the $250
million tax bill for Chevron was a "critical decision" and a test
case.
Write to Bradley Olson at Bradley.Olson@wsj.com and Robb M.
Stewart at robb.stewart@wsj.com
(END) Dow Jones Newswires
May 23, 2017 05:44 ET (09:44 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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