11 November 2015
At a very high level, it’s a simple concept: a multinational borrows money from a related company overseas, and then uses the interest bill and the repayment methods to reduce tax exposure in Australia.
If the loans – and the interest rates – are big enough, the tax savings can be significant – so much so, that the practice has become a point of mounting concern among policymakers and in the community. But the solutions to it are complicated and run the risk of prompting large companies to overlook Australia as a destination for further investment.
However, the system, which uses loans taken out in the US as a tax-free transport system for cash, is in danger of unraveling, sending Chevron and other big operators on deep dives of their books to see whether they can withstand extra scrutiny from the Australian Tax Office (ATO).
The Federal Court has found the scheme, at least in one instance between 2004 and 2008, did not fit the test of an “arm’s length” deal between related companies, which essentially means that it must be commercially viable as if it was done with an independent party.