This case was about a cross border financing arrangement used by Chevron Australia to reduce it’s taxes – a round robin. Chevron Australia had set up a company in the US, Chevron Texaco Funding Corporation, which borrowed money in US dollars at an interest rate of 1.2% and then made an Australian dollar loan at 8.9% to the Australian parent company. The loan increased Chevron Australia’s costs and reduced taxable profits. The interest payments, which was not taxed in the US, came back to Australia in the form of tax free dividends. The US company was just a shell created for the sole purpose of raising funds in the commercial paper market and then lending those funds to the Australian company. Australian Courts ruled in favor of the tax administration and the case was since appealed by Chevron. In April 2017 the Federal Court decided to dismiss Chevron’s appeal. (Following the Federal Court’s decision, Chevron appealed to the High Court, but in August 2017 Chevron announced that the appeal had been withdrawn.) ...

The Orica case involve funding of an overseas entity or operations by an Australian entity, where the funds are subsequently provided back to the Australian entity or its Australian associate in a manner which purportedly generates Australian tax deductions while not generating corresponding Australian assessable income (Free dip). The arrangements essentially involve the “round robin” movement of funds where an entity claims income tax deductions in Australia for costs of borrowing or obtaining other financial benefits (including satisfaction of liabilities) from an overseas party the loan or other financial benefit provided by the overseas party is in substance funded, directly or indirectly, by an investment by the entity claiming the deductions or its Australian associate the return on the Australian investment, reflecting the financing costs payable to the overseas party, comes back to Australia in a non-taxable or concessionally taxed form, for example, as a distribution from an overseas subsidiary which is not assessable under Subdivision 768-A of the Income Tax Assessment Act 1997 (ITAA 1997). Similar arrangements may display some or all of the following features: the entity claiming the Australian tax deductions is related to the overseas party providing the loan or other financial benefit the overseas party is an entity resident in a low tax jurisdiction, or is otherwise not taxable in the overseas country on any financing costs payable by the entity claiming the deductions, for example, because it can claim foreign tax credits or tax losses in the overseas country use of hybrid entities or instruments such that: i. the financing costs payable to the overseas party which are deducted in Australia are not taxable in the relevant overseas jurisdiction, or ii. the financing costs are deducted twice, i.e. once in Australia and once by the hybrid entity or the hybrid entity’s owners in the overseas jurisdiction the financing costs payable to the overseas party is not income taxable in Australia under Australia’s controlled foreign company (CFC) provisions the non-assessable foreign sourced income distributed to the Australian entity increases its ‘conduit foreign income’ balance so it can distribute unfranked dividends funded from its Australian profits to its foreign shareholders free of dividend withholding tax there is no cash transfer of relevant funds and relevant steps are said to be carried out by journal entries the arrangement produces a commercial outcome or achieves an overall advantage to the global group because of the Australian tax benefits ...

The Australien Chevron case was about a $US 2.5 billion intercompany loan between Chevron Australia and its US subsidiary, Chevron Texaco, and whether the interest paid on the loan by Chevron Australia exceeded the arm’s length price. Chevron Australia had set up a company in the US, Chevron Texaco Funding Corporation, which borrowed money in US dollars at an interest rate of 1.2% and then made an Australian dollar loan at 8.9% to the Australian parent company. This 8,9% interest increased Chevron Australia’s costs, and reduced taxable profits. These interest payments, which was not taxed in the US, came back to Australia in the form of tax free dividends. The US company was just a shell created for the sole purpose of raising funds in the commercial paper market and then lending those funds to the Australian company. Chevron argued that the 8,9% interest rate was taking into account the risk of raising loans written in US dollars and then turning that into an Australian dollar loan. The Court ruled in favor of the tax administration and the case has since been appealed by Chevron. The ruling was based on the following arguments: The interest rate applied to the intra-group financial transaction was high because there was no security and no financial or operational covenants. Under similar conditions, an independent entity would have been required to provide security  and subject to financial or operational covenants Hence, at arm’s length the applicable interest rate would have been (much) lower ...