US multinational energy corporation Chevron faces an increased tax bill of $340 million after losing an appeal against the Australian Taxation Office (ATO), over a landmark profit-shifting case.
The full Federal Court on April 21 unanimously upheld a previous decision that Chevron engaged in illegitimate transfer pricing by paying a higher rate of interest on a loan from its subsidiary to shift profits from Australia to the US.
The decision will bolster efforts by the ATO to crack down on the profit-shifting of hundreds of billions of dollars in related-party loans by multinational companies. The Federal Court found that a US entity was set up to borrow funds at a rate of 1.2% to lend them to its Australian parent, Chevron Holdings Pty Ltd, at an artificial interest rate of 9%.
The tax dispute relates to an assessment by the ATO that increased Chevron's tax bill for the years 2004 to 2008 by $340 million, which was upheld by the Federal Court in October.
Jason Ward, a spokesperson for the Tax Justice Network (TJN), said the decision was "an important victory for the ATO and the Australian people”.
"It sends a clear message to Chevron and other multinationals that these tax dodging schemes will no longer be tolerated,” he said.
"We hope this will force Chevron to restructure their current $42 billion loan so that Australians won't be cheated out of tens of billions in future tax revenue in a scheme even more damaging than the one in this court case."
In December 2016, a TJN analysis of ATO data found that for the second year running Chevron had paid no corporate tax. Research has shown that profit-shifting by multinational corporations costs the Australian treasury $6 billion a year.
Professor Robert Deutsch, senior tax counsel at The Tax Institute, said the Federal Court verdict was "an important victory for the ATO" that would have "serious implications" for the tax affairs of other multinational companies.
"Multinationals should as a matter of urgency review their existing offshore financing arrangements in light of this decision,” he said.
"The decision may yet be appealed to the High Court, but there is neither certainty that such an appeal will be made nor, if made, that it would be successful. For the moment, all parties should proceed on the basis that the full Federal Court has provided the final word on this matter."
The ATO's audit and compliance work is currently heavily focused on related-party loans, which were worth $420 billion in 2014–15. About a quarter of these were in the oil and gas sector, with companies paying $3.9 billion in interest to affiliates offshore.
Head of Global Transfer Pricing at BDO Zara Ritchie said the ATO win could influence the OECD, which was about to publish its latest guide on the application of arm's length principles to intra-group financing arrangements: "If this happens, the Chevron case may become one of the most important transfer pricing related court cases not only in Australia, but also across the globe."
A 2015 report by the International Transport Workers Federation (ITF) accused Chevron of hiding more than $US35 billion in untaxed revenue offshore. With US$197 billion in market capitalisation, Chevron is the world's third largest and most profitable oil and gas company.
The ITF said Chevron had at least 600 shell companies in tax havens such as Bermuda and the US state of Delaware, and its tax returns had been challenged in the US and other countries. The report said the US government had not approved Chevron's tax filings for more than seven years.
Chevron owns the Gorgon and Wheatstone gas projects off the northern coast of Western Australia, worth about $84 billion. The company will pay no Petroleum Rent Resource Tax (PRRT) on Gorgon for the first eight years of its operation.
Fairfax business columnist Michael West said: "Secretive oil major Chevron Corp has taken the art of tax avoidance to its ultimate form, thanks to a scheme so aggressive that it goes beyond merely reducing exposure to income tax, but rather, has been designed to make a profit from the ATO."
Sharan Burrow, general secretary of the International Trade Union Confederation (ITUC), said: "Aggressive tax avoidance hurts schools and hospitals, undermines governments, and expands inequality. If Chevron avoids so much tax in Australia, imagine what they might do elsewhere.
"Australia needs to ensure Chevron pays its fair share, and we need a global examination of Chevron's tax schemes."
Chevron is infamous throughout Latin America for its ruthless refusal to accept any legal responsibility for the environmental destruction of large parts of Ecuador's Amazon rainforest due to massive pollution caused during decades of oil extraction in that country.
Operating from 1964 to 1992, the US oil giant Texaco, taken over by Chevron in 2001, spilled at least 71 million litres of waste oil and 64 million litres of crude oil in more than two million acres of the Ecuadorian Amazon, creating an unprecedented ecological disaster and immense harm to the health of the people living in the region.
An Ecuadorian court eventually ordered Chevron to pay US$19 billion to the affected communities, but the company has adamantly refused to accept the verdict. They have appealed to international arbitration against Ecuador, and have launched a legal and publicity war against the government of Ecuador over the issue.
The battle is continuing. Clearly, Chevron is one of the most rapacious and brutal multinational corporations in the capitalist world.
While any decision that makes greedy corporations like Chevron pay a bit more tax is welcome, the problem of corporate greed will not be finally solved until these companies are taken over by people-centred governments and their ill-gotten wealth is re-invested into programs of social and environmental justice.