Chevron in Big-Stakes Tax Fight -- WSJ

Billions of dollars are at risk as Australia disputes how oil major lowers unit's income

A contentious tax dispute between Australia and Chevron Corp. could cost the company billions of dollars and open a new front in global efforts to crack down on the aggressive tax strategies used by many multinational corporations.

The case deals with Chevron's practice of financing its Australian operations by providing loans to its in-country subsidiary at interest rates much higher than market benchmarks, even though the company pays less to raise capital. The arrangement boosts the Australian unit's costs, in turn reducing taxable profit. In some cases, the difference in rates was almost 7 percentage points, according to reports released as part of a court case in Australia.

Chevron, which says its tax strategies are legal, last month lost an appeal of a 2015 ruling in favor of the Australian Taxation office and said Friday that it is planning an appeal to the country's highest court.

The case is limited to Chevon's business dealings in Australia, and means the company owes a tax bill of about $250 million, including penalties, for the tax years from 2004 to 2008. But the ruling could cost Chevron far more if the same principles are applied to the company's massive natural-gas export projects in the country, which it and several partners have spent more than $80 billion since 2009 to build. Australia's tax office is auditing Chevron over similar issues during that later period.

Should the same principles apply in more recent years, Chevron's tax bill could jump by about $150 million to $300 million a year, according to a Wall Street Journal analysis of company interest rates in both jurisdictions. Over a decade, that would amount to as much as $3 billion, although the exact figure would depend on a number of factors, including oil and natural-gas prices and how long Chevron takes to repay the loans.

"There's an awful lot at stake with this ruling, not just for Chevron but for any intercompany lending in Australia and, more broadly, around the globe," Pat Yarrington, Chevron's chief financial officer, told investors in a conference call last month. "If the ruling stands, it's certainly going to affect any future investment in Australia."

The stakes go beyond Chevron. Regulators in the U.S., European Union and elsewhere have cracked down on what tax professionals call an aggressive use of transfer pricing -- setting payments to subsidiaries for services in order to shift profits to low-tax jurisdictions and expenses to high-tax areas. Such practices can save billions of dollars across industries, tax experts say.

But several experts said this was the first tax ruling on this scale that they could recall involving the interest rates an international company charged to a subsidiary.

Previous cases, which have involved corporations such as Coca-Cola Co., Facebook Inc. and Starbucks Corp., centered on how companies sell assets to subsidiaries or charge them for licensing fees, royalties or other goods. Those disputes have often hinged on the value of whatever is being sold to a subsidiary, which can be hard to determine in the case of unique items such as the formula for a beverage or another proprietary business matter.

Examining loans and interest charges to subsidiaries could prove simpler for investigators because of the relative transparency associated with interest-rate benchmarks, tax professionals said.

"Interest rates on loans are a prime candidate for transfer-pricing scrutiny," said Robert Willens, an independent tax adviser.

Australia's tax office has been aggressive in its scrutiny of global corporations and is auditing Apple Inc., Google parent Alphabet Inc. and Microsoft Corp. Those audits have been linked to where the companies book revenue. Company representatives have said their tax practices are legal in Australia.

With Chevron, the Australia tax office has zeroed in on the use of what it believes are higher-than-market interest rates to reduce in-country profits, as well as the costs of shipping goods, both items of particular import to Australia's newfound status as a natural-gas exporting superpower. The U.S. is also weighing limits to tax benefits from interest payments, according to one of the tax overhaul packages being considered by Congress.

Australia's tax office is pursuing a number of other cases that involve how much companies charge their subsidiaries in interest, often called related-party loans. In the 2014-2015 tax year, related-party loans in Australia exceeded $300 billion, about half of which involved resource companies.

Taxation of energy companies has become a political issue in Australia. The country is closing in on Qatar as the world's largest natural-gas exporter. Yet natural-gas shortages in some regions have sparked surging prices and blackouts. And Australia stands to collect a fraction of the taxes and royalties Qatar receives from its energy exports, according to an analysis by the International Transport Workers' Federation, a labor organization that has targeted the tax strategies of multinational corporations around the world.

Although Chevron's projects have led to billions of dollars in payroll and other taxes in Australia, the company isn't projected to pay any corporate income tax for more than a decade. That's because the cost of its gas-export projects ballooned as companies rushed in, then profitability was hit by a crash in gas prices.

Energy consultancy Wood Mackenzie estimates that Chevron's Gorgon project, one of the biggest gas-export developments in the world, has a projected rate of return of just 7.7%, down from 12.6% when the company made its investment decision in 2009.

As a corporation, Chevron pays an interest rate of about 2.25% on debt of about $32 billion, according to company documents. On their current debt, the company's Australia-related subsidiaries pay a rate that is about 2.63% higher than the interbank lending rate in the country, documents show.

That rate differential, as well as questions over how much the company pays subsidiaries for certain other services, are at the center of the current Australia audit, which could take as long as a decade to resolve.

Michael Fenner, Chevron's taxation manager in Australia, said in a hearing that its interest-rate arrangements related to loans for the gas projects were different from those at issue in the 2004-2008 dispute. "I cannot say there is no spillover, but nor can you say there's a direct correlation in the outcomes either," he said.

Jeremy Hirschorn, a deputy commissioner at the Australian Taxation Office, said the recent court ruling upholding the $250 million tax bill for Chevron was a "critical decision" and a test case.

Write to Bradley Olson at Bradley.Olson@wsj.com and Robb M. Stewart at robb.stewart@wsj.com

(END) Dow Jones Newswires

May 24, 2017 02:47 ET (06:47 GMT)