Chevron Settles Australian Transfer Pricing Dispute With ATO

U.S. energy giant Chevron Corporation’s (NYSE:CVX) Australian arm Chevron Australia recently settled a tax case with the Australian Taxation Office (ATO). This is a major victory for the Australian government and the ATO. The settlement is likely to cost Chevron around $1 billion.

ATO has been pursuing Chevron Australia over an intercompany loan, worth Australian$3.7 billion from its parent company, to fund Western Australian gas reserves in 2003. In 2015, The Australian Federal Court found that the loan was not an “arm’s length” transaction but on the contrary, has been undertaken to evade taxes. Chevron Australia avoided Australia's company tax rate of 30% in the five out of the last seven years. The company currently owes Australian $340 million in back taxes and penalties for breaching the transfer pricing rules. On Apr 26, the Federal Court upheld its decision against the company and directed it to pay Australian $340 million as tax to the ATO. Concurrent to this directive, Chevron Australia intended to appeal to the High Court, but later decided to resolve the issue by entering into an agreement with the ATO on Aug 15.

Chevron’s decision to not to move to the High Court regarding the issue is expected to have direct implications on other multinationals. In the wake of its victory against the U.S. integrated player, ATO is likely to rake in around $10 billion additional revenues from the other multinational over the next 10 years.

ATO is set to take legal actions against various multinationals for evading taxes. In this regard it is set to pursue legal actions against multinationals like BHP Billiton (LON:BLT) Limited (NYSE:BHP) , Rio Tinto (LON:RIO) plc (NYSE:RIO) and Alphabet Inc. (NASDAQ:GOOGL) who have tried to dodge the transfer pricing rules of Australia. Chevron litigation is one of the most significant and largest cases regarding the cross-border tax disputes. ATO is soon to issue a final set of guidelines concerning cross-border third party financing which will shape all the future tax arrangements concerning Australia’s transfer pricing rules.

Headquartered in California, Chevron is one of the largest publicly traded oil and gas companies in the world, based on proved reserves. It is engaged in oil and gas exploration and production, refining and marketing of petroleum products, manufacturing of chemicals and other energy-related businesses. The company currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In the last six months, the company’s shares fell 3.5% whereas the industry witnessed a decline of 2.2%.

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