International Related Party Loans: What you need to know

In what has been touted as Australia’s biggest tax case, the Australian Taxation Office (ATO) won against Chevron Australia Holdings Pty Ltd (Chevron Australia) in the Full Federal Court earlier in the year.

In contention is the Australian dollar equivalent of a US $2.5billion loan from US Chevron’s subsidiary Chevron Texaco Funding Corporation, to the group’s local arm, Chevron Australia. The ATO succeeded in its $340 million assessment of tax and penalties against Chevron Australia, arguing that the 9% loan interest rate charged was excessive, and would have been much lower had the loan been from an unrelated party.

ATO Framework

Following the Full Federal Court decision, the ATO released a draft practical compliance guideline (2017/D4 PCG) on its approach to taxation issues associated with cross-border related party financing arrangements.

Whilst this type of document is intended for internal use by the ATO, and does not act as a safe harbour, it does give taxpayers an insight into how the ATO deals with issues of this particular nature. It provides the opportunity to self-assess levels of risk, given that certain circumstances dictate that a taxpayer may be required to share their self-assessment with the ATO.

There are six risk zones allotted under a scoring system which is based on the type and nature of the taxpayer’s financing arrangements. Variables include; leverage, appropriate collateral, subordination, currency, hybrid entity and exotic features.

The six risk zones are:

Risk zone Rating Aggregate score
White Not rated n/a
Green Low risk 0 to 4
Blue Low to moderate risk 5 to 10
Yellow Moderate risk 11 to 18
Amber High risk 19 to 24
Red Very high risk 25 or more

If your related party financing arrangement is rated as low risk (green), then you can expect the Commissioner most likely will not apply compliance resources to review the taxation outcomes, other than to verify the accuracy of the risk rating.

Any greater risk than the low risk category and you can expect the Commissioner to monitor, test and/or verify the taxation outcomes of your related party financing arrangement. The ATO believes two-thirds of businesses may be outside of the white and green zones, and therefore may be required to verify their outcomes.

At the very high risk (red) rating, reviews are likely to be commenced by the ATO as a matter of priority and there is an increased prospect of litigation with the ATO following the review or audit activities.

There are clear indicators that cross-border related party financing arrangements are on the ATO’s radar. Whilst the focus in the media has been around international tax avoidance of ‘big businesses’ or ‘large corporations’, with the development of the draft practical compliance guideline (PCG), the framework can be easily applied to any sized multinational company.

If you’d like to understand more about international related party loans, or the ATO’s PCG, please contact your Tax Adviser.

 

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