So Much Choice, One Real Option

Massive news out of Australia on weekend, which may surprisingly go unnoticed. Lucky you’re here, or you just may have missed it. Chevron, one of the worlds largest oil companies has agreed to pay a court enforced fine of over 1 billion dollars to the Australian government as a result of some rather naughty accounting of intercompany loans (don’t worry, we’re going to get to that).  This is huge for so many reasons, and we think it should make you happy.

So Much Choice, One Real Option
In a world of mass-globalisation, large companies now have many different offices in many different locations, as they believe being close to their customers

is important. Disagree? Tell that to the marking folk at Parker Pens (see number 4). Anyway, with many different locations comes many different governments and therefore many different tax regimes. And companies love this. So much. Why? Because the tax rates governments charge businesses can vary significantly across countries. For example, in Australia, the company tax rate is 30%. In Singapore, it’s only 17%. In Ireland, it can be as low as 10%. Whilst you can argue the ethics around it, clever companies, subject to multiple different tax jurisdictions, will ALWAYS try and funnel their profits through to the lowest tax regime available to them in an effort to pay as little tax as possible. And that’s exactly what Chevron tried to do with its intercompany loan and what large corporations like Google, Apple and the like have been doing for years…

Transfer Pricing and Intracompany Loans 
Transfer Pricing is basically the term for how a company prices the exchange of goods and services with itself. In the Chevron case, it was lending money from an overseas office to its Australian office (via an intercompany loan) and charging the Australian office a rate of interest for that loan. Well that all sounds above board so far you say? The thing is, whilst the interest rate for a loan in Australia was like 4%, Chevron was charging its Australian branch something like 15%.

These numbers are indicative only to give you a sense of what they were doing. We don’t know what the rate of interest charged between the offices was as it hasn’t been disclosed, but in short, it was a truck loan more than what it should have been.

Why would Chevron “rip off” their Australian entity like this? Because what is actually happening is they are sneakily shifting their profits from one country to another. The high rate of interest the Australian office paid, was so significant, it resulted in it recording a loss from its Australian operations, so rather than having to pay Australias “high” 30% tax rate, it paid ZERO DOLLARS to the government. Had it instead paid a “fair” rate of interest, it would have made a profit and therefore paid tax to the Australian government.

By moving this money out of Australian (via interest payments), Chevron was able to funnel this money to lower paying tax jurisdictions and therefore pay a lower rate of tax.

Times are A-Changing
And this is why the 1 billion dollar fine, which has been upheld by the High Court of Australia, is so important. It basically says that companies can no longer charge other parts of their companies “non-market-rates” for these transfer payments. It means that going forward, if Chevron wants to lend its Australian entity money, it has to do so at a fair rate, not at one which essentially erodes all profit from the Australian branch.

Companies use Transfer Pricing ALL THE TIME to move profits to different countries in an effort to minimise their tax bill. Apple, Facebook, Google and many others have been guilty of this for years and the Australian government until now, have had no way to regulate these transfer prices which has cost the government literally billions of dollars in unpaid taxes. But this ruling changes all of that.

Got a finance question, but short on time? Send us an email at daily@5minute.finance and we’ll help you out
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Categories: Tax

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