Chevron Australia Holdings Pty Ltd v Commissioner of Taxation (No 4)
[2015] FCA 1092
Robertson J
SUMMARY
In accordance with the practice of the Court in some cases that have attracted publicity, particularly in the case of lengthy reasons for judgment, the Court has prepared a summary of the judgment. The only authoritative statement of the Court’s reasons is that contained in the published reasons for judgment. The summary has no legal status as part of, or in explanation of, the reasons for judgment themselves. What follows is such a summary.
These 16 tax appeals, and an application under s 39B of the Judiciary Act, concern the financial years 2004-2008.
Central to the proceedings is a Credit Facility Agreement dated 6 June 2003 under which the applicant taxpayer Chevron Australia Holdings Pty Ltd (CAHPL) borrowed the equivalent in AUD of USD 2.5 billion from a United States based subsidiary of CAHPL, ChevronTexaco Funding Corporation (CFC).
The case does not involve the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 nor does the case involve any allegation that the Credit Facility Agreement was a sham.
The proceedings do involve: under the Income Tax Assessment Act 1936, the issue of arm’s length consideration where a taxpayer, here CAHPL, has acquired property under an international agreement; under the Income Tax Assessment Act 1997, the cross-border transfer pricing rules; and the transfer pricing rules in Australia’s double tax agreements, particularly the Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion (the United States convention).
I have decided that CAHPL’s challenges to the amended assessments under Division 13 of the Income Tax Assessment Act 1936 fail and, in the alternative, that CAHPL’s challenges to the amended assessments under Division 815 of the Income Tax Assessment Act 1997 fail.
I have also held that CAHPL’s challenge to the constitutional validity of Subdivision 815-A, in particular ss 815-10 to 815-30 of the Income Tax Assessment Act 1997, as introduced by the Tax Laws Amendment (Cross-Border Transfer Pricing) Act (No. 1) 2012, and when read with s 815-1 of the Income Tax (Transitional Provisions) Act 1997, should be dismissed.
I have also found the penalty to be 25% of the scheme shortfall amount, pursuant to s 284-160(a)(ii) in Schedule 1 to the Taxation Administration Act 1953.
The published reasons for judgment and this summary will be available on the Internet at Robertson
23 October 2015
FEDERAL COURT OF AUSTRALIA
Chevron Australia Holdings Pty Ltd v Commissioner of Taxation (No 4) [2015] FCA 1092
Citation: Chevron Australia Holdings Pty Ltd v Commissioner of Taxation (No 4) [2015] FCA 1092 Parties: CHEVRON AUSTRALIA HOLDINGS PTY LTD v COMMISSIONER OF TAXATION File numbers: NSD 569 of 2012, NSD 570 of 2012,
NSD 571 of 2012, NSD 572 of 2012,
NSD 573 of 2012, NSD 574 of 2012,
NSD 575 of 2012, NSD 576 of 2012,
NSD 577 of 2012, NSD 578 of 2012,
NSD 151 of 2013, NSD 152 of 2013,
NSD 153 of 2013, NSD 154 of 2013,
NSD 155 of 2013, NSD 156 of 2013,
NSD 440 of 2013Judge: ROBERTSON J Date of judgment: 23 October 2015 Catchwords: CONSTITUTIONAL LAW – power to make laws with respect to taxation – whether Income Tax Assessment Act 1997 (Cth) Subdiv 815-A was retroactive – whether ss 815-10 to 815-30 invalid as imposing an arbitrary exaction and therefore not answering the description of a law with respect to taxation – Constitution s 51(ii)
INCOME TAX – international taxation – transfer pricing – application of Div 13 of Pt III of the Income Tax Assessment Act 1936 (Cth) – application of Subdiv 815-A of the Income Tax Assessment Act 1997 (Cth)
INTERNATIONAL LAW – double taxation treaty between Australia and the United States of America – Art 9 – associated enterprises – when an entity gets a transfer pricing benefit – s 815-15(1)(c) of the Income Tax Assessment Act 1997 (Cth)
Legislation: Constitution ss 51(ii), 51(xxxi), 55
Evidence Act 1995 (Cth) s 135
Income Tax Assessment Act 1936 (Cth) ss 136AA, 136AC, 136AD, 170, 175, 177
Income Tax Assessment Act 1997 (Cth) ss 6-25, 815-10, 815-15, 815-20, 815-30, 995-1
Income Tax (Transitional Provisions) Act 1997 (Cth) ss 815-1, 815-5, 815-15
International Tax Agreements Act 1953 (Cth) ss 3, 4, 5, 6
Judiciary Act 1903 (Cth) ss 39B, 78B
Tax Laws Amendment (Cross-Border Transfer Pricing) Act (No. 1) 2012 (Cth)Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Act 2013 (Cth)
Taxation Administration Act1953 (Cth) ss 14ZYA, 14ZZO, 284-145, 284-150, 284-160 in Sch 1
Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income 6 August 1982, [1983] ATS 16 (entered into force 31 October 1983) Arts 3, 7, 9, 11
Convention between the Government of Australia and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains 21 August 2003, [2003] ATS 22 (entered into force 17 December 2003) Arts 7, 9
Cases cited: Ajinomoto Company Inc v NutraSweet Australia Pty Ltd [2008] FCAFC 34; 166 FCR 530
Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW) [1948] HCA 28; 77 CLR 143
ASIC v Great Northern Developments Pty Ltd [2010] NSWSC 1087; 242 FLR 444
Avon Downs Pty Ltd v Commissioner of Taxation (Cth) [1949] HCA 26; 78 CLR 353Brushaber v Union Pacific Railroad Company 240 US 1 (1916)
Chief Commissioner of State Revenue v Dick Smith Electronics Holdings Pty Ltd [2005] HCA 3; 221 CLR 496
Chong v Commissioner of Taxation (Cth) [2000] FCA 635; 101 FCR 134Coleman v Shell Co of Australia (1943) 45 SR (NSW) 27
Commissioner of Taxation (Cth) v Futuris Corp Ltd [2008] HCA 32; 237 CLR 146Commissioner of Taxation (Cth) v Lamesa Holdings BV [1997] FCA 785; 77 FCR 597
Commissioner of Taxation (Cth) v Ludekens [2013] FCAFC 100; 214 FCR 149
Commissioner of Taxation (Cth) v SNF (Australia) Pty Limited [2011] FCAFC 74; 193 FCR 149
Commonwealth of Australia v SCI Operations Pty Ltd [1998] HCA 20; 192 CLR 285
Commissioner of Taxation (Cth) v Star City Pty Ltd (No 2) [2009] FCAFC 122; 180 FCR 448
Commissioner of Taxation (Cth) v Trail Bros Steel & Plastics Pty Ltd [2010] FCAFC 94; 186 FCR 410Deputy Commissioner of Taxation (Cth) vTruhold Benefit Pty Ltd [1985] HCA 36; 158 CLR 678
GE Capital Finance Pty Ltd v Commissioner of Taxation (Cth) [2007] FCA 558; 159 FCR 473Greenock Harbour Trustees v Greenock Corporation (1905) 13 SLT 367
Jones v Dunkel [1959] HCA 8; 101 CLR 298
King Gee Clothing Co Pty Ltd v Commonwealth [1945] HCA 23; 71 CLR 184MacCormick v Commissioner of Taxation(Cth) [1984] HCA 20; 158 CLR 622
McAndrew v Commissioner of Taxation (Cth) [1956] HCA 62; 98 CLR 263
McGain v Commissionerof Taxation (Cth) [1965] HCA 41; 112 CLR 523
McGain v Commissioner of Taxation (Cth) [1966] HCA 34; 116 CLR 172Momcilovic v The Queen [2011] HCA 34; 245 CLR 1
Mutual Pools & Staff Pty Ltd v Commonwealth [1994] HCA 9; 179 CLR 155
New South Wales v Corbett [2007] HCA 32; 230 CLR 606R v Commissioner of Taxation (WA); Ex parte Briggs (1986) 12 FCR 301
Re Roche Products Pty Ltd v Commissioner of Taxation (Cth) [2008] AATA 639; 70 ATR 703
Roy Morgan Research Pty Ltd v Commissioner of Taxation (Cth) [2011] HCA 35; 244 CLR 97Sackville-West v Viscount Holmesdale (1870) LR 4 HL 543
Samarkos v Commissioner for Corporate Affairs [1988] NTSC 10; 52 NTR 1
Seaton v Mosman Municipal Council [1998] NSWSC 75; 98 LGERA 81SNF (Australia) Pty Ltd v Commissioner of Taxation (Cth) [2010] FCA 635; 79 ATR 193
Undershaft (No 1) Ltd v Commissioner of Taxation (Cth) [2009] FCA 41; 175 FCR 150
United States v Carlton 512 US 26 (1994)Vela Fishing Ltd v Commissioner of Inland Revenue [2004] 1 NZLR 313
Winter v Ministry of Transport [1972] NZLR 539
WR Carpenter Holdings Pty Ltd v Commissioner of Taxation (Cth) [2006] FCA 1252; 234 ALR 451WR Carpenter Holdings Pty Ltd v Commissioner of Taxation (Cth) [2007] FCAFC 103; 161 FCR 1
WR CarpenterHoldings Pty Ltd v Commissioner of Taxation (Cth) [2008] HCA 33; 237 CLR 198Date of hearing: 29 September-3 October, 7-9 October, 13-17 October, 20-24 October, 27-30 October and 21 November 2014 Date of last submissions: 5 December 2014 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 633 Counsel for the Applicant: Mr DH Bloom QC with Mr SH Steward QC, Mr P Kulevski, Ms KS Deards, Ms LA Hespe and Ms C Ensor Solicitor for the Applicant: King & Wood Mallesons Counsel for the Respondent: Mr JW De Wijn QC with Mr GR Kennett SC, Mr TM Thawley SC, Ms CA Burnett and Ms TL Phillips Solicitor for the Respondent: Maddocks Lawyers; Minter Ellison Lawyers
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 569 of 2012
NSD 570 of 2012
NSD 571 of 2012
NSD 572 of 2012 NSD 573 of 2012
NSD 574 of 2012
NSD 575 of 2012
NSD 576 of 2012
NSD 577 of 2012
NSD 578 of 2012
NSD 151 of 2013
NSD 152 of 2013
NSD 153 of 2013
NSD 154 of 2013
NSD 155 of 2013
NSD 156 of 2013
NSD 440 of 2013
BETWEEN: CHEVRON AUSTRALIA HOLDINGS PTY LTD
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
ROBERTSON J
DATE OF ORDER:
23 OCTOBER 2015
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.Within 21 days, the parties bring in agreed short minutes to give effect to these reasons. Those short minutes are also to deal with costs.
2.Failing agreement, within a further 7 days the parties are to file the competing orders for which they contend and any written submissions in support, the submissions on each side to be limited to 3 pages.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 569 of 2012
NSD 570 of 2012
NSD 571 of 2012
NSD 572 of 2012
NSD 573 of 2012
NSD 574 of 2012
NSD 575 of 2012
NSD 576 of 2012
NSD 577 of 2012
NSD 578 of 2012
NSD 151 of 2013
NSD 152 of 2013
NSD 153 of 2013
NSD 154 of 2013
NSD 155 of 2013
NSD 156 of 2013
NSD 440 of 2013
BETWEEN: CHEVRON AUSTRALIA HOLDINGS PTY LTD
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
ROBERTSON J
DATE:
23 OCTOBER 2015
PLACE:
SYDNEY
REASONS FOR JUDGMENT
TABLE OF CONTENTS
Introduction
[1]
NSD 569 to 578 of 2012
[5]
NSD 151 to 156 of 2013
[8]
NSD 440 of 2013
[11]
The legislation
[12]
Structure of applicant’s case
[28]
Structure of respondent’s case
[35]
Consideration of the parties’ administrative submissions
[42]
Article 9 of the United States convention
[50]
Division 13 of the ITAA 1936
[63]
Arm’s length consideration
[64]
The statutory integers – ITAA 1936
[66]
The evidence
[90]-[479]
Consideration
[480]
Division 13 of the ITAA 1936
[480]
Division 815 of the ITAA 1997
[526]
Is Subdivision 815-A constitutionally invalid?
[528]
Preconditions to the making of the Subdiv 815-A 2012 determinations
[554]
Penalties
[615]
Rulings on evidence
[632]
Orders
[633]
Introduction
The applicant is Chevron Australia Holdings Pty Ltd (CAHPL). These proceedings concern the financial years 2004-2008, inclusive.
Central to the proceedings is a Credit Facility Agreement dated 6 June 2003 between CAHPL and ChevronTexaco Funding Corporation (CFC) under which CFC agreed to make advances from time to time to CAHPL “in the aggregate the equivalent in Australian Dollars … of Two Billion Five Hundred Million United States Dollars”. Interest was payable monthly at a rate equal to “1-month AUD-LIBOR-BBA as determined with respect to each Interest Period +4.14% per annum” and the final maturity date was 30 June 2008 (the Credit Facility Agreement). The loan was repayable in full after five years but with provision for early repayment at CAHPL’s option. CAHPL provided no guarantee to CFC and did not provide to CFC any security over its other assets. CFC was entitled to terminate the Credit Facility Agreement at any time without cause. CAHPL had the right to prepay any advance made to it. CAHPL and CFC are related, each having a common parent, Chevron Corporation (CVX), and CFC being a subsidiary of CAHPL. CAHPL and CFC were not dealing with each other at arm’s length.
The proceedings do not involve the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936). Neither do they involve any allegation that the Credit Facility Agreement was a sham. The proceedings do involve: under the ITAA 1936, the issue of arm’s length consideration where a taxpayer, here CAHPL, has acquired property under an international agreement; under the Income Tax Assessment Act 1997 (Cth) (ITAA 1997), the cross-border transfer pricing rules; and the transfer pricing rules in Australia’s double tax agreements, particularly the Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (6 August 1982, [1983] ATS 16 (entered into force 31 October 1983)) (the United States convention).
A general procedural history is as follows.
NSD 569 to 578 of 2012
These ten tax appeals concern determinations dated 30 April 2010 under s 136AD(3) of the ITAA 1936 for each of the years ended 31 December 2003 to 2007 (2004 to 2008 tax years) inclusive. The determinations were made by Mr Gavin Roberts, an officer in the Large Business and International line of the Australian Taxation Office, acting in the name of Ms Cheryl-Lea Field, an Acting Deputy Commissioner of Taxation. On 20 May 2010, the Commissioner issued notices of amended assessment to CAHPL for each of the 2004 to 2008 tax years inclusive (the 2010 amended assessments). On 21 May 2010, the Commissioner issued notices of assessment of scheme shortfall penalty (the 2010 penalty assessments). CAHPL objected against the 2010 amended assessments and the 2010 penalty assessments which were deemed to be disallowed as the Commissioner did not make an objection decision within 60 days of receiving notices under s 14ZYA of the Taxation Administration Act1953 (Cth). On 20 April 2012, CAHPL filed notices of appeal in this Court.
The determinations dated 30 April 2010 took the following form, referring to CAHPL:
DETERMINATIONS MADE PURSUANT TO SUB-SECTION 136AD(3) OF THE INCOME TAX ASSESSMENT ACT 1936 (“THE ACT”)
…
I, Cheryl-Lea Field, Acting Deputy Commissioner of Taxation, Large Business and International, in the exercise of the powers and functions delegated to me by the Commissioner of Taxation:
1.find that, for the purposes of paragraph 136AD(3)(a) of the Act, Chevron Holdings Pty Ltd has acquired property under an international agreement;
2.am satisfied for the purposes of paragraph 136AD(3)(b) of the Act, that having regard to
(a) the connection between any 2 or more parties to the international agreement; and
(b) to (sic) the other relevant circumstances,
that the parties to the international agreement or any 2 or more of those parties were not dealing at arm’s length with each other in relation to the acquisition;
3.find that, for the purposes of paragraph 136AD(3)(c) of the Act, Chevron Holdings Pty Ltd gave or agreed to give consideration in respect of the acquisition and the amount of that consideration (that is, $162,854,342) exceeded the arms (sic) length consideration in respect of the acquisition (that is, $91,048,496); and
4.determine, for the purposes of paragraph 136AD(3)(d) of the Act, that sub-section 136AD(3) should apply in relation to Chevron Holdings Pty Ltd in relation to the acquisition.
It follows from the above that, for all purposes of the application of the Act in relation to Chevron Holdings Pty Ltd, consideration equal to the arm’s length consideration in respect of the acquisition shall be deemed to be the consideration given or agreed to be given by Chevron Holdings Pty Ltd in respect of the acquisition.
Dated the 30th day of April 2010:
Cheryl-Lea Field [Signature of Gavin Roberts] p.p Gavin Roberts
Cheryl-Lea Field
Acting Deputy Commissioner of Taxation
Large Business and International
The determinations dated 30 April 2010 were accompanied by a document of the same date entitled “Reasons for Decision to Apply s 136AD of the Income Tax Assessment Act1936 (the Act)”.
NSD 151 to 156 of 2013
These six tax appeals concern only the years ended 31 December 2005 to 2007 (2006 to 2008 tax years) inclusive.
On 24 October 2012, the Commissioner made determinations under s 815-30 of the ITAA 1997 for each of these years. On 26 October 2012, the Commissioner issued notices of amended assessment to CAHPL for each of the 2006 to 2008 tax years, inclusive (the 2012 amended assessments). On 26 October 2012, the Commissioner issued notices of assessment of scheme shortfall penalty for these years (the 2012 penalty assessments). On 31 January 2013, CAHPL filed notices of appeal in this Court. CAHPL also filed notices of a constitutional matter under s 78B of the Judiciary Act 1903 (Cth) with respect to NSD 151 to 156 of 2013.
The determinations made on 24 October 2012 took the following form, using the year ended 31 December 2005 as an example:
Determination made pursuant to section 815-30 of Division 815 of the Income Tax Assessment Act 1997
I, Annette Chooi, Deputy Commissioner, Large Business and International, in the exercise of the powers and functions delegated to me by the Commissioner of Taxation, determine under paragraph 815-30(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) that the taxable income of Chevron Australia Holdings Pty Ltd … (“the taxpayer”) be increased by the amount of $149,639,013 for the year ended 31 December 2005 (in lieu of the year of income ended 30 June 2006).
I further determine under paragraph 815-30(2)(b) of the ITAA 1997, that the amount of the increase is attributable to a decrease of $149,639,013 in interest deductions of the taxpayer in the year ended 31 December 2005 (in lieu of the year of income ended 30 June 2006).
NSD 440 of 2013
On 14 March 2013, CAHPL filed an application for relief under s 39B of the Judiciary Act. This application challenged the validity of the notices of amended assessment dated 20 May 2010 in respect of the years ended 31 December 2005, 31 December 2006 and 31 December 2007. Alternatively, the application sought a declaration that Subdiv 815-A of the ITAA 1997, as introduced by the Tax Laws Amendment (Cross-Border Transfer Pricing) Act (No. 1) 2012 (Cth), and when read with s 815-1 of the Income Tax (Transitional Provisions) Act 1997 (Cth), were not valid laws of the Commonwealth within s 51 of the Constitution and/or were laws with respect to the acquisition of property which contravened s 51(xxxi) of the Constitution and the notices called notices of amended assessment dated 26 October 2012 in respect of the years ended 31 December 2005, 31 December 2006 and 31 December 2007 were not valid notices of assessment under the ITAA 1936 and/or the ITAA 1997.
The legislation
Section 136AD of the ITAA 1936, so far as relevant, was in the following terms.
136AD Arm’s length consideration deemed to be received or given
…
(3) Where:
(a) a taxpayer has acquired property under an international agreement;
(b)the Commissioner, having regard to any connection between any 2 or more of the parties to the agreement or to any other relevant circumstances, is satisfied that the parties to the agreement, or any 2 or more of those parties, were not dealing at arm’s length with each other in relation to the acquisition;
(c)the taxpayer gave or agreed to give consideration in respect of the acquisition and the amount of that consideration exceeded the arm’s length consideration in respect of the acquisition; and
(d)the Commissioner determines that this subsection should apply in relation to the taxpayer in relation to the acquisition;
then, for all purposes of the application of this Act in relation to the taxpayer, consideration equal to the arm’s length consideration in respect of the acquisition shall be deemed to be the consideration given or agreed to be given by the taxpayer in respect of the acquisition.
(4)For the purposes of this section, where, for any reason (including an insufficiency of information available to the Commissioner), it is not possible or not practicable for the Commissioner to ascertain the arm’s length consideration in respect of the supply or acquisition of property, the arm’s length consideration in respect of the supply or acquisition shall be deemed to be such amount as the Commissioner determines.
Section 136AD(4) is reproduced to provide statutory context for the interpretation of the balance of the provision. No determination under that provision relevant to these proceedings was made by the Commissioner.
Relevant definitions were set out in s 136AA of the ITAA 1936, as follows.
(1)In this Division, unless the contrary intention appears:
acquire includes:
(a)acquire by way of purchase, exchange, lease, hire or hire-purchase; and
(b) obtain, gain or receive.
agreement means any agreement, arrangement, transaction, understanding or scheme, whether formal or informal, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings.
…
property includes:
(a) a chose in action;
(b)any estate, interest, right or power, whether at law or in equity, in or over property;
(c) any right to receive income; and
(d) services.
…
services includes any rights, benefits, privileges or facilities and, without limiting the generality of the foregoing, includes the rights, benefits, privileges or facilities that are, or are to be, provided, granted or conferred under:
(a) an agreement for or in relation to:
(i)the performance of work (including work of a professional nature);
(ii) the provision of, or the use or enjoyment of facilities for, amusement, entertainment, recreation or instruction;
(iii)the conferring of rights, benefits or privileges for which consideration is payable in the form of a royalty, tribute, levy or similar exaction; or
(iv) the carriage, storage or packaging of any property or the doing of any other act in relation to property;
(b) an agreement of insurance;
(c)an agreement between a banker and a customer of the banker entered into in the course of the carrying on by the banker of the business of banking; or
(d) an agreement for or in relation to the lending of moneys.
…
(3) In this Division, unless the contrary intention appears:
(a)a reference to the supply or acquisition of property includes a reference to agreeing to supply or acquire property;
(b)a reference to consideration includes a reference to property supplied or acquired as consideration and a reference to the amount of any such consideration is a reference to the value of the property;
(c)a reference to the arm’s length consideration in respect of the supply of property is a reference to the consideration that might reasonably be expected to have been received or receivable as consideration in respect of the supply if the property had been supplied under an agreement between independent parties dealing at arm’s length with each other in relation to the supply;
(d)a reference to the arm’s length consideration in respect of the acquisition of property is a reference to the consideration that might reasonably be expected to have been given or agreed to be given in respect of the acquisition if the property had been acquired under an agreement between independent parties dealing at arm’s length with each other in relation to the acquisition; and
(e)a reference to the supply or acquisition of property under an agreement includes a reference to the supply or acquisition of property in connection with an agreement.
Section 136AC of the ITAA 1936 was in the following terms.
136AC International agreements
For the purposes of this Division, an agreement is an international agreement if:
(a)a non-resident supplied or acquired property under the agreement otherwise than in connection with a business carried on in Australia by the non-resident at or through a permanent establishment of the non-resident in Australia; or
(b)a resident carrying on a business outside Australia supplied or acquired property under the agreement, being property supplied or acquired in connection with that business; or
(c) a taxpayer:
(i)supplied or acquired property under the agreement in connection with a business; and
(ii)carries on that business in an area covered by an international tax sharing treaty.
Section 170 of the ITAA 1936 provided, so far as relevant:
…
(9B)Subject to subsection (9C), nothing in this section prevents the amendment, at any time, of an assessment for the purpose of giving effect to a prescribed provision, a relevant provision, or Subdivision 815-A of the Income Tax Assessment Act 1997.
Note:Subdivision 815-A of the Income Tax Assessment Act 1997 is about cross-border transfer pricing.
(9C)Subsection (9B) does not authorize the Commissioner, for the purpose of giving effect to a prescribed provision or a relevant provision, to amend an assessment made in relation to a taxpayer in relation to a year of income where:
(a)in a case where the purpose of the amendment is to give effect to the prescribed provision in relation to the supply or acquisition of property—the prescribed provision has been previously applied, in relation to that supply or acquisition, in making or amending an assessment in relation to the taxpayer in relation to the year of income; or
(b)in any other case—the prescribed provision, the relevant provision, or Subdivision 815-A of the Income Tax Assessment Act 1997, as the case may be, has been previously applied, in relation to the same subject matter, in making or amending an assessment in relation to the taxpayer in relation to the year of income.
…
Definitions
(14) In this section, unless the contrary intention appears:
double taxation agreement means an agreement within the meaning of the International Tax Agreements Act1953.
limited amendment period, for an assessment, means the period within which the Commissioner may amend the assessment:
(a) under item 1, 2, 3 or 4 of the table in subsection (1); or
(b) under paragraph (3)(a) or (b).
prescribed provision means section 136AD or 136AE.
relevant provision means:
(a)a provision of a double taxation agreement that attributes to a permanent establishment or to an enterprise the profits it might be expected to derive if it were independent and dealing at arm’s length; or
(b)paragraph 7, 8 or 9 of Article 5, or Article 7, of the Taxation Code in Annex G to the Timor Sea Treaty or a provision of any other international tax sharing treaty that corresponds with any of those paragraphs or that Article.
scheme has the meaning given by subsection 995-1(1) of the Income Tax Assessment Act 1997.
scheme benefit has the meaning given by section 284-150 in Schedule 1 to the Taxation Administration Act 1953.
Sections 175 and 177(1) of the ITAA 1936 provided:
175 Validity of assessment
The validity of any assessment shall not be affected by reason that any of the provisions of this Act have not been complied with.
177 Evidence
(1)The production of a notice of assessment, or of a document under the hand of the Commissioner, a Second Commissioner, or a Deputy Commissioner, purporting to be a copy of a notice of assessment, shall be conclusive evidence of the due making of the assessment and, except in proceedings under Part IVC of the Taxation Administration Act 1953 on a review or appeal relating to the assessment, that the amount and all the particulars of the assessment are correct.
Section 815-1 of the Income Tax (Transitional Provisions) Act provided as follows:
815-1 Application of Subdivision 815-A of the Income Tax Assessment Act 1997
(1) Subdivision 815-A of the Income Tax Assessment Act 1997 applies to income years starting on or after 1 July 2004.
(2) However, Subdivision 815-A does not apply to an income year to which Subdivisions 815-B and 815-C of that Act apply.
Note:For the income years to which Subdivisions 815-B and 815-C apply, see section 815-15 of this Act.
815-5 Cross-border transfer pricing guidance
Despite section 815-20 of the Income Tax Assessment Act 1997, the documents covered by that section for an income year that starts before 1 July 2012 are taken to be as follows:
(a)the Model Tax Convention on Income and on Capital, and its Commentaries, as adopted by the Council of the Organisation for Economic Cooperation and Development and last amended before the start of the income year;
(b)the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, as approved by that Council and last amended before the start of the income year.
Section 815-15 of that Act referred to the start date for Subdivs 815-B, 815-C and 815-D of the ITAA 1997 in respect of tax other than withholding tax as the earlier of 1 July 2013 and the day the Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Act 2013 (Cth) received the Royal Assent. That date was 29 June 2013.
Subdivision 815-A of the ITAA 1997 was in the following terms.
815-1 What this Subdivision is about
The cross-border transfer pricing rules in this Subdivision are equivalent to, but independent of, the transfer pricing rules in Australia’s double tax agreements.
…
Operative provisions
815-5 Object
The object of this Subdivision is to ensure the following amounts are appropriately brought to tax in Australia, consistent with the arm’s length principle:
(a)profits which would have accrued to an Australian entity if it had been dealing at *arm’s length, but, by reason of non-arm’s length conditions operating between the entity and its foreign associated entities, have not so accrued;
(b)profits which an Australian permanent establishment (within the meaning of the relevant *international tax agreement) of a foreign entity might have been expected to make if it were a distinct and separate entity engaged in the same or similar activities under the same or similar conditions, but dealing wholly independently.
815-10 Transfer pricing benefit may be negated
(1)The Commissioner may make a determination mentioned in subsection 815‑30(1), in writing, for the purpose of negating a *transfer pricing benefit an entity gets.
Treaty requirement
(2) However, this section only applies to an entity if:
(a)the entity gets the *transfer pricing benefit under subsection 815‑15(1) at a time when an *international tax agreement containing an *associated enterprises article applies to the entity; or
(b)the entity gets the transfer pricing benefit under subsection 815-15(2) at a time when an international tax agreement containing a *business profits article applies to the entity.
815-15 When an entity gets a transfer pricing benefit
Transfer pricing benefit—associated enterprises
(1) An entity gets a transfer pricing benefit if:
(a) the entity is an Australian resident; and
(b)the requirements in the *associated enterprises article for the application of that article to the entity are met; and
(c)an amount of profits which, but for the conditions mentioned in the article, might have been expected to accrue to the entity, has, by reason of those conditions, not so accrued; and
(d) had that amount of profits so accrued to the entity:
(i)the amount of the taxable income of the entity for an income year would be greater than its actual amount; or
(ii)the amount of a tax loss of the entity for an income year would be less than its actual amount; or
(iii)the amount of a *net capital loss of the entity for an income year would be less than its actual amount.
The amount of the transfer pricing benefit is the difference between the amounts mentioned in subparagraph (d)(i), (ii) or (iii) (as the case requires).
Transfer pricing benefit—business profits
(2) A foreign resident entity gets a transfer pricing benefit if:
(a)the entity has a permanent establishment (within the meaning of the *international tax agreement) in Australia; and
(b)the amount of profits attributed to the permanent establishment falls short of the amount of profits the permanent establishment might be expected to make if it were a distinct and separate entity engaged, and dealing, in the manner mentioned in the *business profits article; and
(c)had the profits attributed to the permanent establishment included that shortfall:
(i)the amount of the taxable income of the entity for an income year would be greater than its actual amount; or
(ii)the amount of a tax loss of the entity for an income year would be less than its actual amount; or
(iii)the amount of a *net capital loss of the entity for an income year would be less than its actual amount.
The amount of the transfer pricing benefit is the difference between the amounts mentioned in subparagraph (c)(i), (ii) or (iii) (as the case requires).
Nil amounts
(3)For the purposes of working out whether an entity gets a *transfer pricing benefit, and of negating that benefit under subsection 815-30(1):
(a)treat an entity that has no taxable income for an income year as having a taxable income for the year of a nil amount; and
(b)treat an entity that has no tax loss for an income year as having a tax loss for the year of a nil amount; and
(c)treat an entity that has no *net capital loss for an income year as having a net capital loss for the year of a nil amount.
Multiple transfer pricing benefits
(4)To avoid doubt, an entity may get 2 or more *transfer pricing benefits, in one or more income years, in relation to one amount of profits, or one shortfall of profits.
Meaning of associated enterprises article
(5) An associated enterprises article is:
(a)Article 9 of the United Kingdom convention (within the meaning of the International Tax Agreements Act 1953); or
(b) a corresponding provision of another *international tax agreement.
Meaning of business profits article
(6) A business profits article is:
(a)Article 7 of the United Kingdom convention (within the meaning of the International Tax Agreements Act 1953); or
(b) a corresponding provision of another *international tax agreement.
815-20 Cross-border transfer pricing guidance
(1)For the purpose of determining the effect this Subdivision has in relation to an entity:
(a)work out whether an entity gets a *transfer pricing benefit consistently with the documents covered by this section, to the extent the documents are relevant; and
(b)interpret a provision of an *international tax agreement consistently with those documents, to the extent they are relevant.
(2) The documents covered by this section are as follows:
(a)the Model Tax Convention on Income and on Capital, and its Commentaries, as adopted by the Council of the Organisation for Economic Cooperation and Development and last amended on 22 July 2010;
(b)the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, as approved by that Council and last amended on 22 July 2010;
(c)a document, or part of a document, prescribed by the regulations for the purposes of this paragraph.
(3)However, a document, or a part of a document, mentioned in paragraph (2)(a) or (b) is not covered by this section if the regulations so prescribe.
(4)Regulations made for the purposes of paragraph (2)(c) or subsection (3) may prescribe different documents or parts of documents for different circumstances.
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815-30 Determinations negating transfer pricing benefit
(1) The determinations the Commissioner may make are as follows:
(a)a determination of an amount by which the taxable income of the entity for an income year is increased;
(b)a determination of an amount by which the tax loss of the entity for an income year is decreased;
(c)a determination of an amount by which the *net capital loss of the entity for an income year is decreased.
(2)If the Commissioner makes a determination under subsection (1), the determination is taken to be attributable, to the relevant extent, to such of the following as the Commissioner may determine:
(a)an increase of a particular amount in assessable income of the entity for an income year under a particular provision of this Act;
(b)a decrease of a particular amount in particular deductions of the entity for an income year;
(c)an increase of a particular amount in particular capital gains of the entity for an income year;
(d)a decrease of a particular amount in particular capital losses of the entity for an income year.
(3)If the Commissioner makes a determination under subsection (1), the Commissioner must make a determination under subsection (2), unless it is not possible or practicable for the Commissioner to do so.
Example:If section 815-25 is relevant in working out the transfer pricing benefit an entity gets, this subsection requires the Commissioner to make a determination relating to the debt deductions of the entity.
(4)Nothing done under subsection (2) affects the validity of a determination made under subsection (1).
(5)The Commissioner may take such action as the Commissioner considers necessary to give effect to a determination under this section.
(6)The Commissioner must give a copy of a determination under this section to the entity.
(7)A failure to comply with subsection (6) does not affect the validity of the determination.
(8)To avoid doubt, the Commissioner may include all or any determinations under this section in relation to a particular entity, including determinations of different kinds, in the same document.
815-35 Consequential adjustments
Consequential adjustment—associated enterprises
(1)The Commissioner may make a determination under subsection (4) in relation to an entity (the disadvantaged entity) if:
(a)the Commissioner makes a determination under subsection 815-30(1) in relation to a *transfer pricing benefit an entity gets under subsection 815-15(1); and
(b)the Commissioner considers that, but for the conditions mentioned in the *associated enterprises article:
(i)the amount of the taxable income of the disadvantaged entity for an income year might have been expected to be less than its actual amount; or
(ii)the amount of a tax loss of the disadvantaged entity for an income year might have been expected to be greater than its actual amount; or
(iii)the amount of a *net capital loss of the disadvantaged entity for an income year might have been expected to be greater than its actual amount; or
(iv)an amount of *withholding tax payable in respect of interest or royalties by the disadvantaged entity might have been expected to be less than its actual amount; and
(c)the Commissioner considers that it is fair and reasonable that the actual amount mentioned in subparagraph (b)(i), (ii), (iii) or (iv) (as the case requires) be adjusted accordingly.
Consequential adjustment—business profits
(1)The Commissioner may make a determination under subsection (4) in relation to an entity (the disadvantaged entity) if:
(a)the Commissioner makes a determination under subsection 815-30(1) in relation to a *transfer pricing benefit an entity gets under subsection 815-15(2); and
(b)the Commissioner considers that, if the permanent establishment were a distinct and separate entity engaged, and dealing, in the manner mentioned in the *business profits article:
(i)the amount of the taxable income of the disadvantaged entity for an income year might have been expected to be less than its actual amount; or
(ii)the amount of a tax loss of the disadvantaged entity for an income year might have been expected to be greater than its actual amount; or
(iii)the amount of a *net capital loss of the disadvantaged entity for an income year might have been expected to be greater than its actual amount; or
(iv)an amount of *withholding tax payable in respect of interest or royalties by the disadvantaged entity might have been expected to be less than its actual amount; and
(c)the Commissioner considers that it is fair and reasonable that the actual amount mentioned in subparagraph (b)(i), (ii), (iii) or (iv) (as the case requires) be adjusted accordingly.
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Nil amounts
(3) For the purposes of this section:
(a)treat an entity that has no taxable income for an income year as having a taxable income for the year of a nil amount; and
(b)treat an entity that has no tax loss for an income year as having a tax loss for the year of a nil amount; and
(c)treat an entity that has no *net capital loss for an income year as having a net capital loss for the year of a nil amount.
Consequential adjustment—determinations
(4)The Commissioner may make one or more of the following determinations, in writing, for the purpose of adjusting an amount as mentioned in paragraph (1)(c) or (2)(c):
(a)a determination of an amount by which the taxable income of the disadvantaged entity for an income year is decreased;
(b)a determination of an amount by which the tax loss of the disadvantaged entity for an income year is increased;
(c)a determination of an amount by which the *net capital loss of the disadvantaged entity for an income year is increased;
(d)a determination of an amount by which the *withholding tax payable by the disadvantaged entity in respect of interest or royalties is decreased.
(5)The Commissioner may take such action as the Commissioner considers necessary to give effect to a determination under this section.
(6)The Commissioner must give a copy of a determination under this section to the disadvantaged entity.
(7)A failure to comply with subsection (6) does not affect the validity of the determination.
(8)To avoid doubt, the Commissioner may include all or any determinations under this section in relation to a particular entity, including determinations of different kinds, in the same document.
(9)An entity may give the Commissioner a written request to make a determination under this section relating to the entity. The Commissioner must decide whether or not to grant the request, and give the entity notice of the Commissioner’s decision.
(10)If an entity is dissatisfied with the Commissioner’s decision, the entity may object, in the manner set out in Part IVC of the TaxationAdministration Act 1953, against that decision.
815-40No double taxation
(1)The amount of a *transfer pricing benefit that is negated under this Subdivision for an entity is not to be taken into account again under another provision of this Act to increase the entity’s assessable income, reduce the entity’s deductions or reduce a *net capital loss of the entity.
(2)Subsection (1) has effect despite section 136AB of the Income Tax Assessment Act 1936.
Section 6-25 of the ITAA 1997, relied on by the respondent Commissioner, was in the following terms:
6-25 Relationships among various rules about ordinary income
(1)Sometimes more than one rule includes an amount in your assessable income:
·the same amount may be *ordinary income and may also be included in your assessable income by one or more provisions about assessable income; or
·the same amount may be included in your assessable income by more than one provision about assessable income.
For a summary list of the provisions about assessable income, see section 10-5.
However, the amount is included only once in your assessable income for an income year, and is then not included in your assessable income for any other income year.
(2)Unless the contrary intention appears, the provisions of this Act (outside this Part) prevail over the rules about *ordinary income.
Note: This Act contains some specific provisions about how far the rules about ordinary income prevail over the other provisions of this Act.
Relevant definitions were in s 995-1 of the ITAA 1997, as follows.
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arm’s length: in determining whether parties deal at arm’s length, consider any connection between them and any other relevant circumstance.
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associated enterprises article has the meaning given by subsection 815-15(5).
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business profits article has the meaning given by subsection 815-15(6).
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international tax agreement means an agreement (within the meaning of the International Tax Agreements Act 1953) to which that Act gives the force of law.
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transfer pricing benefit has the meaning given by section 815-15.
The International Tax Agreements Act 1953 (Cth) provided in ss 3(1), 3(2) and 3AAA:
3 Interpretation
(1)In this Act:
agreement means a treaty or other agreement described in section 3AAA (about current agreements) or 3AAB (about agreements for earlier periods).
Note:Most of the conventions, protocols and other agreements described in these sections are set out in the Australian Treaty Series. In 2011, the text of an agreement in the Australian Treaty Series was accessible through the Australian Treaties Library on the website (
(2)For the purposes of this Act and the Assessment Act, a reference in an agreement to profits of an activity or business shall, in relation to Australian tax, be read, where the context so permits, as a reference to taxable income derived from that activity or business.
3AAA Definitions – current agreements
(1)In this Act:
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United Kingdom convention means:
(a)the Convention between the Government of Australia and the Government of the United Kingdom of Great Britain and Northern Ireland for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital gains; and
(b)the exchange of notes relating to that convention;
each done at Canberra on 21 August 2003.
Note:The text of this convention and notes is set out in Australian Treaty Series 2003 No. 22 ([2003] ATS 22).
United States convention means the Convention between the Government of Australia and the Government of the United States of America for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, done at Sydney on 6 August 1982.
Note:The text of this convention is set out in Australian Treaty Series 1983 No. 16 ([1983] ATS 16).
United States protocol (No. 1) means the protocol, done at Canberra on 27 September 2001, amending the United States convention.
Note:The text of this protocol is set out in Australian Treaty Series 2003 No. 14 ([2003] ATS 14).
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Section 4 of the International Tax Agreements Act provided:
4 Incorporation of Assessment Act
(1)Subject to subsection (2), the Assessment Act is incorporated and shall be read as one with this Act.
Note: An effect of this provision is that people who acquire information under this Act are subject to the confidentiality obligations and exceptions in Division 355 in Schedule 1 to the Taxation Administration Act 1953.
(2)The provisions of this Act have effect notwithstanding anything inconsistent with those provisions contained in the Assessment Act (other than Part IVA of the Income Tax Assessment Act 1936) or in an Act imposing Australian tax.
Section 5 of the International Tax Agreements Act provided:
5 Current agreements have the force of law
(1)Subject to this Act, on and after the date of entry into force of a provision of an agreement mentioned below, the provision has the force of law according to its tenor.
The United States convention was such an agreement.
Section 6 of the International Tax Agreements Act provided:
6 Convention with United States of America
The United States convention (as amended by the United States protocol (No. 1)) does not subject to Australian tax any interest paid by a resident of Australia to a resident of the United States of America that, apart from that convention, would not be subject to Australian tax.
Articles 7 and 9 of the Convention between the Government of Australia and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains (21 August 2003, [2003] ATS 22 (entered into force 17 December 2003)) (the United Kingdom convention) (see ss 815-15(5) and (6) at [19] above) provided:
ARTICLE 7
Business profits
1 The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated in that other State. If the enterprise carries on business in that manner, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.
2 Subject to the provisions of paragraph 3 of this Article, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated in that other State, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment or with other enterprises.
3 In determining the profits of a permanent establishment, there shall be allowed as deductions expenses of the enterprise, being expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred, whether in the Contracting State in which the permanent establishment is situated or elsewhere.
4 Nothing in this Article shall affect the application of any law of a Contracting State relating to the determination of the tax liability of a person in cases where the information available to the competent authority of that State is inadequate to determine the profits to be attributed to a permanent establishment. In such cases that law shall be applied, having regard to the information that is available, consistently with the principles of this Article.
5 No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise.
6 Where profits include items of income or gains which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article.
7 Nothing in this Article shall affect the operation of any law of a Contracting State relating to tax imposed on profits from insurance with non-residents provided that if the relevant law in force in either Contracting State at the date of signature of this Convention is varied (otherwise than in minor respects so as not to affect its general character) the Contracting States shall consult with each other with a view to agreeing to any amendment of this paragraph that may be appropriate.
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ARTICLE 9
Associated enterprises
1 Where:
(a) an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State; or
(b) the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State;
and in either case conditions operate between the two enterprises in their commercial or financial relations which differ from those which might be expected to operate between independent enterprises dealing wholly independently with one another, then any profits which might, but for those conditions, have been expected to accrue to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.
2 Nothing in this Article shall affect the application of any law of a Contracting State relating to the determination of the tax liability of a person in cases where the information available to the competent authority of that State is inadequate to determine the profits accruing to an enterprise. In such cases that law shall be applied, having regard to the information that is available, consistently with the principles of this Article.
3 Where profits on which an enterprise of a Contracting State has been charged to tax in that State are also included, by virtue of the provisions of paragraphs 1 or 2, in the profits of an enterprise of the other Contracting State and charged to tax in that other State, and the profits so included are profits which might have been expected to have accrued to that enterprise of the other State if the conditions operative between the enterprises had been those which might have been expected to have operated between independent enterprises dealing wholly independently with one another, then the first-mentioned State shall make an appropriate adjustment to the amount of tax it has charged on those profits. In determining such adjustment, due regard shall be had to the other provisions of this Convention and the competent authorities of the Contracting States shall if necessary consult each other.
Of primary relevance is the United States convention. Articles 7 and 9 were in the following terms:
Article 7
Business profits
(1) The business profits of an enterprise of one of the Contracting States shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the business profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.
(2) Subject to the provisions of paragraph (3), where an enterprise of one of the Contracting States carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the business profits which it might be expected to make if it were a distinct and independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment or with other enterprises with which it deals.
(3) In the determination of the business profits of a permanent establishment, there shall be allowed as deductions expenses which are reasonably connected with the profits (including executive and general administrative expenses) and which would be deductible if the permanent establishment were an independent entity which paid those expenses, whether incurred in the Contracting State in which the permanent establishment is situated or elsewhere.
(4) No business profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise.
(5) For the purposes of the preceding paragraphs of this Article, the business profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary.
(6) Where business profits include items of income which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article.
(7) Nothing in this Article shall affect the application of any law of a Contracting State relating to the determination of the tax liability of a person in cases where the information available to the competent authority of that State is inadequate to determine the profits to be attributed to a permanent establishment, provided that, on the basis of the available information, the determination of the profits of the permanent establishment is consistent with the principles stated in this Article.
(8) Nothing in this Article shall in a Contracting State prevent the operation in that State of its law relating specifically to the taxation of any person who carries on the business of any form of insurance (as long as that law as in effect on the date of signature of this Convention is not varied otherwise than in minor respects so as not to affect its general character).
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Article 9
Associated enterprises
(1) Where:
(a) an enterprise of one of the Contracting States participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State; or
(b) the same persons participate directly or indirectly in the management, control or capital of an enterprise of one of the Contracting States and an enterprise of the other Contracting State,
and in either case conditions operate between the two enterprises in their commercial or financial relations which differ from those which might be expected to operate between independent enterprises dealing wholly independently with one another, then any profits which, but for those conditions, might have been expected to accrue to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.
(2) Where profits on which an enterprise of one of the Contracting States has been charged to tax in that State are also included, by virtue of paragraph (1), in the profits of an enterprise of the other Contracting State and taxed accordingly, and the profits so included are profits which might have been expected to have accrued to that enterprise of the other State if the conditions operative between the enterprises had been those which might have been expected to have operated between independent enterprises dealing wholly independently with one another, then the first-mentioned State shall make an appropriate adjustment to the amount of tax charged on those profits in the first-mentioned State. In determining such an adjustment, due regard shall be had to the other provisions of this Convention and the competent authorities of the Contracting States shall if necessary consult each other.
(3) Nothing in this Article shall affect the application of any law of a Contracting State relating to the determination of the tax liability of a person, including determinations in cases where the information available to the competent authority of that State is inadequate to determine the income to be attributed to an enterprise, provided that, on the basis of the available information, the determination of that tax liability is consistent with the principles stated in this Article.
Structure of applicant’s case
The applicant, CAHPL, outlined its primary and alternative cases as follows.
CAHPL’s primary case was that the determinations made under Div 13 of Pt III of the ITAA 1936 were invalid or inoperative and could not be relied upon by the Commissioner in support of the Div 13 2010 amended assessments because:
(a)they were made by a person who was not authorised to make them, or;
(b)in relation to the 2006 to 2008 years, because they ceased to be operative once the 2012 amended assessments were made under Subdiv 815-A of the ITAA 1997 for those years.
If the determinations made under Div 13 of Pt III of the ITAA 1936 were invalid, the Div 13 2010 amended assessments were excessive with the consequence that the only issue in relation to the 2004 and 2005 years was whether a liability arose directly under Art 9 of the United States convention. In that respect CAHPL contended:
(i)Art 9 did not confer a separate and independent power to tax; and even if it did,
(ii)there were no criteria for liability under Art 9; or
(iii)if there were criteria for liability under Art 9, they were not made out in the present case.
CAHPL needed to succeed on only one of those arguments to demonstrate that the amended assessments in respect of the 2004 and 2005 years were excessive.
With respect to the 2006, 2007 and 2008 years, in addition to the issues set out in relation to Art 9 there was a further issue which was whether the determinations under Subdiv 815-A of the ITAA 1997 supported the Subdiv 815-A 2012 amended assessments for those years. The alternative contentions raised by CAHPL in relation to that issue were:
(i) Subdiv 815-A was constitutionally invalid; alternatively,
(ii)the statutory preconditions for the making of a Subdiv 815-A determination were not satisfied.
CAHPL needed to succeed on only one of those arguments to demonstrate that the amended assessments in the 2006, 2007 and 2008 years were excessive.
CAHPL’s alternative case proceeded from the assumption that the determinations made under Div 13 of Pt III of the ITAA 1936 were valid and that they supported the Div 13 2010 amended assessments. In that case, the first consequence was that the Subdiv 815-A determinations and 2012 amended assessments necessarily fell away because an essential precondition for the making of the Subdiv 815-A determinations did not exist; there could be no “transfer pricing benefit” and the Commissioner could not make a determination under s 815-10 “for the purpose of” negating a transfer pricing benefit that did not exist.
Further, in any case, CAHPL submitted that the Div 13 2010 amended assessments, if valid, were still excessive because:
(a)the interest paid by CAHPL did not exceed “the arm’s length consideration” for the purposes of Div 13 of Pt III of the ITAA 1936; and
(b)Art 9 did not confer a separate and independent power to tax; and even if it did, there were no criteria for liability under Art 9, or, if there were criteria for liability under Art 9, they were not made out here. On any view, the Div 13 2010 amended assessments could not be supported by reliance on Art 9.
Finally, if, contrary to CAHPL’s submissions, both the determinations made under Div 13 of Pt III of the ITAA 1936 and the Subdiv 815-A determinations were valid and simultaneously operative as alternatives, then the Subdiv 815-A 2012 amended assessments of necessity supplanted the Div 13 2010 amended assessments (which thereby ceased to be operative). In that case, the contentions in [31] above were relied upon.
Structure of respondent’s case
The respondent submitted there was no foundation for the suggestion that “alternative” assessments had been issued for the 2004 to 2008 income years. First, further amended assessments were issued in October 2012 in relation only to the 2006 to 2008 years, so that questions concerning the relationship between the two sets of determinations and assessments applied only to those years. As to those years, 2006 to 2008, there was nothing on the face of the notices of assessment issued in October 2012 to indicate that they were intended to operate otherwise than as amended assessments in the ordinary way so as to amend the existing assessments to operate as altered or added to. The true nature of what was intended was a change to the process of calculation of liability to tax which, in this instance, did not lead to a change in the amount of tax payable.
For each of the 2006 to 2008 income years, the 2012 amended assessments became the definitive statement of CAHPL’s income tax liability. However, the amendments made in 2010 continued to have effect. They remained extant and incorporated into the 2012 assessments. Further, the Div 13 determinations did not cease to be operative upon the making of the later amended assessments. The Div 13 determinations had not been revoked and therefore, to the extent that they had operation when made, they continued to have that operation. The Div 13 determinations were relied on to support the 2010 amended assessments and they also supported the 2012 amended assessments. The amendment effected in 2012 was the inclusion of determinations under Subdiv 815-A as an additional basis for the existing ascertainment of taxable income.
For the income years to which the 2012 amended assessments applied, the Div 13 determinations and the Subdiv 815-A determinations operated in the alternative to each other as support for the 2012 amended assessments. That was the consequence of s 815-40 and s 6‑25. Alternatively, if the applicant was correct in submitting that the deeming effect of the Div 13 determinations correspondingly reduced or eliminated the “transfer pricing benefits” upon which the Subdiv 815-A determinations would operate, to that extent the Subdiv 815-A determinations had no work to do and fell away. It might be that, if the Div 13 determinations were given their full effect, the amendments effected in October 2012 would be seen to be unnecessary, but it would not follow that the assessments were excessive. This was an example of the common case where the Commissioner defended an assessment on an alternative basis.
As to the Div 13 determinations, the Commissioner submitted that the relevant determinations and the statements of reasons which accompanied them recorded the state of satisfaction referred to in s 136AD(3)(b) and it was not necessary to record the existence of that state of satisfaction in the Appeal Statement.
The Commissioner did not submit that the state of satisfaction thus recorded was evidence of the relevant state of satisfaction having been personally held by Ms Field. It was accepted that the state of mind which the documents recorded was that of Mr Roberts.
It was not in issue that at relevant times Mr Roberts was an Executive Level 2 (EL2) officer and the Commissioner conceded that the instrument of authorisation (described at [41] below) did not confer authority on Mr Roberts to make a determination under s 136AD(3)(d). Otherwise, Mr Roberts had the general authority to form a state of satisfaction as to whether circumstances met a statutory description, such as that required by s 136AD(3)(b). Thus, if the state of satisfaction was an independent and separately examinable determinant of liability to tax, Mr Roberts had the necessary authority to form that state of satisfaction on behalf of the Commissioner or a delegate. On the other hand, if the existence of the relevant state of satisfaction was a factor going only to the validity of a determination under s 136AD(3)(d), it was an aspect of the “due making” of the assessment which was not open to challenge on judicial review grounds in Part IVC proceedings. It was accepted that the relevant instrument of authorisation did not confer authority on Mr Roberts to make determinations under s 136AD(3)(d) and the effect of ss 175 and 177(1) of the ITAA 1936 was therefore critical. Authorities binding on the Court established the position that defects which would render a determination under s 136AD liable to be set aside in judicial review proceedings did not establish the excessiveness of the relevant assessment and were thus irrelevant in proceedings under Part IVC.
The instrument of authorisation dated 11 August 2009 authorised all officers from time to time holding or occupying positions or assigned to duties in Large Business and International and/or who exercised powers and functions in relation to any matters arising in Large Business and International to exercise in the name of the person from time to time holding or occupying the position or assigned to the duties of Deputy Commissioner of Taxation, Large Business and International, all the powers and functions delegated to the office of the Deputy Commissioner of Taxation, Large Business and International, and the powers and functions which the Deputy Commissioner of Taxation, Large Business and International, exercised in his or her own right, including those under the Acts listed in Sch 1 and the regulations made under those Acts, subject to the limitations listed in Schedules 2 to 9. Schedule 2 dealt with authorisations for EL2 officers, and subtracted from the authority of those officers, relevantly, the authority to: “make determinations under Division 13 of Part III of the Income Tax Assessment Act 1936 and make decisions on the business profits and associated enterprises articles of international tax agreements and associated treaties relating to profit shifting”.
Consideration of the parties’ administrative submissions
In my opinion, a consideration of the instrument of authorisation shows that Mr Roberts was authorised to form a view as to whether or not a taxpayer had acquired property under an international agreement (s 136AD(3)(a)); to be satisfied (or not) that the parties were not dealing at arm’s length with each other in relation to the acquisition (s 136AD(3)(b)); and to form a view on whether the amount of the consideration given or agreed to be given by the taxpayer in respect of the acquisition exceeded the arm’s length consideration (s 136AD(3)(c)). Mr Roberts was not authorised to make the determination that the subsection should apply in relation to the taxpayer in relation to the acquisition (s 136AD(3)(d)).
Next to be considered is the function of s 136AD(3) and its relationship with ss 175 and 177(1). The judgment in WR Carpenter Holdings Pty Ltd v Commissioner of Taxation (Cth) [2007] FCAFC 103; 161 FCR 1 at [43] and [48] shows that in a tax appeal the determination under s 136AD(3)(d) is not subject to examination on judicial review grounds, including the ground that the person who made the determination was not authorised to make it. The Full Court said as follows:
[43][W]here Parliament has exhaustively set out the criteria for liability by reference to objective matters, but has made the application of those criteria dependent upon a step being taken by the Commissioner, the step is procedural in the sense that it is not a step which forms part of the criteria for liability. The due making of such a determination is not subject to examination on judicial review grounds.
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[48][T]he Commissioner’s determination under s 177F(1) is posited not on the Commissioner’s opinion about the tax benefit or that such a benefit results in connection with the scheme, for these are matters of objective fact. They are elements or criteria for liability to tax, but the Commissioner’s opinion about them is not. In this sense, the determination is procedural and the due making of it is beyond examination.
To the same effect are the earlier observations at [27]-[29] as follows:
[27] Division 13 sets up a number of objectively ascertainable criteria, the satisfaction of which will create liability. Relevantly for present purposes, those are:
Ÿan international agreement
Ÿbetween parties not dealing with each other at arm’s length
Ÿunder which property
Ÿis supplied
Ÿfor less than the arm’s length consideration in respect of the supply or for no consideration.
[28] In Pt IVC proceedings a taxpayer may challenge, by evidence and argument, the existence of all or any of those criteria. The taxpayer bears the burden of doing so. However, the matters in respect of which the applicants in the present case seek particulars do not concern the existence or otherwise of any of these criteria.
[29]In making the para (d) determination that s 136AD(1) or s 136AD(2) should apply, the Commissioner is not making any finding as to an element or criterion of tax liability.
The reasoning of the Full Court in WR Carpenter Holdings 161 FCR 1, particularly at [48], was expressly approved in Commissioner of Taxation (Cth) v Trail Bros Steel & Plastics Pty Ltd [2010] FCAFC 94; 186 FCR 410 at [57].
The applicant CAHPL relied on what Lindgren J had said at first instance in WR Carpenter Holdings Pty Ltd v Commissioner of Taxation (Cth) [2006] FCA 1252; 234 ALR 451 at [144]:
Neither section [177F nor 136AD] makes the existence of any particular state of mind of the Commissioner in relation to the making of the determination, a condition of the power to make it. Sleight [Commissioner of Taxation vSleight (2004) 136 FCR 211] should be regarded as establishing that the legislature has revealed an intention that even in an appeal under Pt IVC of the TAA [Taxation Administration Act], the Commissioner’s reasoning that led him to make the determination is shielded by s 177(1) of the ITAA 1936 from attack on judicial review grounds as part of the “due making” of the assessment. Of course, the fact itself of the making of the determination goes to the substantive liability to tax: if a determination was not even purportedly made, or if a determination purportedly made was not authorised by the ITAA 1936 because the statutorily prescribed conditions of the enlivening of the power were not satisfied, or, I suggest, failed to satisfy the Hickman principle, the assessment will be shown to be excessive.
In the present case, however, there was a determination which was purportedly made, by Mr Roberts. It follows that I reject the applicant’s submission that because Mr Roberts was not authorised to make determinations under Div 13, the determinations are a nullity and cannot be relied upon to defend the amended assessments and that as a consequence the Div 13 2010 amended assessments are excessive. I do not accept the submission that what the High Court said in WR Carpenter Holdings Pty Ltd v Commissioner of Taxation (Cth) [2008] HCA 33; 237 CLR 198 at [40], in referring to the vitiation of a determination by extraneous purposes amounting to jurisdictional error, applies to the present case, as their Honours’ reference to Commissioner of Taxation (Cth) v Futuris Corp Ltd [2008] HCA 32; 237 CLR 146 makes clear. (In Futuris at [25] the High Court referred to tentative or provisional assessments which for that reason do not answer the statutory description in s 175 and which may attract a remedy for jurisdictional error, and to conscious maladministration of the assessment process.) It follows that I also reject the applicant’s submission that s 175 is not engaged as the applicant does not seek to impugn the validity of the amended assessment, but rather relies on the invalidity of the determination to demonstrate excessiveness of the assessment based upon it. In my opinion, since s 177(1) establishes, on the production of a notice of assessment, or of a copy of a notice of assessment under the hand of an officer there specified, the “due making” of the assessments, a defect of the kind presently under consideration in a determination under s 136AD(3)(d) which forms part of the making of the assessments does not demonstrate excessiveness of the assessment. Neither, in my opinion, does it lead to the assessments being liable to be set aside in circumstances outside those with which Futuris deals.
I regard the cases on s 170 of the ITAA 1936, on which the applicant relied, as distinguishable. In particular, the applicant relied on what was said in McAndrew v Commissioner of Taxation (Cth) [1956] HCA 62; 98 CLR 263 at 271 concerning s 170(2) which conferred authority on the Commissioner to amend an assessment where the taxpayer had not made to the Commissioner a full and true disclosure of all the material facts necessary for his assessment and there had been an avoidance of tax. Dixon CJ, McTiernan and Webb JJ said, at 271:
But bearing in mind that the word “excessive” relates to the amount of the substantive liability it is not difficult to see that it will extend over the area in which the conditions mentioned in s. 170(2) find a place. For the fulfilment of those conditions goes to the power of the commissioner to impose the liability by amendment. If he cannot amend consistently with s. 170(2) and so increase the amount of the assessment then it must be excessive.
In the present case, however, what is excluded is whether the decision to issue a determination was made in accordance with the statutory requirements. It remains to consider whether the assessment is or is not excessive by reference to what may be called the objective facts.
Article 9 of the United States convention
In relation to Art 9 of the United States convention and the ITAA 1936, the respondent Commissioner submitted that Art 9 operated by itself without s 815. I understood this submission to mean that Art 9 could be relied on also in relation to the amended assessments under the ITAA 1936. Reference was made by the respondent to the decision of the primary judge in SNF (Australia) Pty Ltd v Commissioner of Taxation (Cth) [2010] FCA 635; 79 ATR 193 and to the decision of the Full Court in Commissioner of Taxation (Cth) v SNF (Australia) Pty Limited [2011] FCAFC 74; 193 FCR 149.
The applicant submitted that Art 9 did not, and could not, confer a separate and independent imposition of taxation on its income (or deemed income). This contention went, in part, to whether Art 9, independently of the transfer pricing provisions in the domestic legislation, could be relied on to support the amended assessments. The applicant submitted that existing authority supported the contention that Art 9 could not, by itself, be so relied on. The applicant referred to the Full Court in Commissioner of Taxation (Cth) v Lamesa Holdings BV [1997] FCA 785; 77 FCR 597; to Chong v Commissioner of Taxation (Cth) [2000] FCA 635; 101 FCR 134; to GE Capital Finance Pty Ltd v Commissioner of Taxation (Cth) [2007] FCA 558; 159 FCR 473; to Re Roche Products Pty Ltd v Commissioner of Taxation (Cth) [2008] AATA 639; 70 ATR 703; to Undershaft (No 1) Ltd v Commissioner of Taxation (Cth) [2009] FCA 41; 175 FCR 150; and to the Full Court in SNF 193 FCR 149.
In my opinion, the decisions to which the respondent refers in this respect do not establish a freestanding substantive operation for Art 9. Further, in my opinion, the authorities on which the applicant relies tend strongly against that conclusion. Different considerations arise in relation to the role of Art 9 when considered in the context of Subdiv 815-A of the ITAA 1997. I turn to consider the authorities relied on by the parties.
Lamesa concerned the Netherlands-Australia Double Taxation Agreement. The Full Court said that the Agreement substantially concerned allocation of taxing powers. Their Honours said, at 600-601:
The Agreement is an agreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. Although, therefore, the Agreement has this dual object, the Agreement substantially concerns allocation of taxing power.
Thus, as will be seen, the agreement allocates to the State, where business is carried on or through a permanent establishment, the right to tax business profits of that State (Art 7). It allocates to the country of residence the power to tax aircraft and ship profits (Art 8). Sometimes, as with Arts 7 and 8, the power allocated to the jurisdiction named is exclusive. Sometimes, as is the case with interest, both jurisdictions may tax but with a nominated limit of 10% in one (Art 11). The allocation is of the right to tax. There is nothing in the Agreement which compels a jurisdiction to exercise that right. Australia, for example, does not tax “exempt income”, although such income could fall within the business profits Article.
So far as the treaty then under consideration was concerned, these observations tend against the submission that a double taxation agreement is a grant of a stand-alone taxing power.
In GE Capital Finance, Middleton J said, at [27] and [36]:
[27] The USA Double Tax Treaty is one of the many double tax treaties entered into by Australia, and has been entered into for the avoidance of double taxation with respect to taxes on income. To achieve its aim of avoiding double taxation, the USA Double Tax Treaty allocates taxing “rights” between the treaty partners. As with all international treaties to which Australia is a party, it forms part of domestic law only because there is legislation which provides for the treaty to be incorporated into Australian law. The Agreements Act gives the force of law to the various international double taxation agreements scheduled to it.
…
[36] It is important to recall that s 3(11) was introduced to amend the Agreements Act and to impact upon the operation of the USA Double Tax Treaty. The Agreements Act and the USA Double Tax Treaty, and in particular Art 7, establish the scope within which the Australian legislature may impose tax. Article 7 provides that in certain circumstances the Contracting State may tax the business profits (which is permissive), but only so much of the business profits as is attributable to the permanent establishment (which involves a prohibition or limitation). Section 3(11) is similarly directed to the ability to impose a tax or the allocation of the power to tax. It is a provision which is to be read and used “for the purpose of determining whether the beneficiary’s share of the income may be taxed in Australia” (emphasis added).
(Original emphasis.)
This analysis also tends against the respondent’s present submission.
In Chong, Goldberg J considered the Malaysian tax treaty, in particular Art 18(2). The respondent in that case, the Commissioner, appears to have put a different argument to the one presently advanced. The Commissioner’s argument was dealt with by Goldberg J, at [24]-[26]:
[24] The respondent submitted that double tax agreements do not allocate the right to tax as such a right already exists by domestic law. Rather, it was said that double tax agreements qualify or limit that right by imposing limitations on the right to tax. The respondent said that a more accurate way to describe the purpose and effect of a double tax agreement was the language used by the Full Court [in Lamesa] at 607 where it said (at 607): “If Art 13 applies, then profit from the alienation is authorised to be taxed in the place where the realty referred to in the Article is.”
[25] I do not consider that there is a significant difference between the concept of allocating taxing power and authorising the subject to be taxed in this context. When the Full Court in Commissioner of Taxation v Lamesa Holdings BV referred to the allocation of taxing power it was referring to the fact that as between two sovereign States with power to impose taxation on particular persons, receipts and events, the agreement was concerned to identify those areas where such power would not be applied. The Full Court saw the concept of the allocation of taxing power as involving the acceptance, if so agreed, of a limitation on an existing taxing power. This view is demonstrated by Art 23 of the Malaysian Agreement which recognises that the taxation laws of each Contracting State continue to govern the taxation of income in that State except where the Agreement provides otherwise.
[26] As a matter of principle it is appropriate to describe the purpose and effect of a double tax agreement, where there are two existing tax systems in two contracting states, as one where areas of taxation are allocated between the two contracting states. The allocation of taxing power in a double tax agreement is predicated on the existence of a sovereign right by a contracting state to impose taxation and the existence of taxation legislation. When one refers to an allocation of taxing power one is doing no more than saying that in an area where both contracting states have the right to impose taxation, and may have already imposed taxation, they have agreed that one contracting state, rather than the other or, as the case may be, both contracting states, shall have the right to impose taxation in that area. Whether one uses the language of allocation of power or the language of limitation of power, the result is the same; there is designated or agreed who shall have the right under the agreement to impose taxation in the particular area.
(Emphasis added. Citation omitted.)
Another significant difference between the parties in construing the provisions was that the applicant submitted, under the heading “Implicit Support” that the terms of Art 9 meant that one must consider the conditions that one might expect to see between a lender and a borrower who are independent, and are dealing wholly independently with one another. In the applicant’s submission, the relationship between the lender and the borrower must therefore be eliminated in order to undertake this task, and in a situation where the entities in question were sister companies, so too must the relationship between each of them and their common parent. If that latter relationship were permitted to subsist, then it could not be said that the lender and borrower were independent or were dealing independently. Their hypothetical dealing would be infected by the characteristics of each party, the borrower in particular, that were referable to ownership by the common parent.
The applicant submitted that a textual analysis of Art 9 supported the contention that the concept of “independent enterprises” was used in contradistinction to, and as the converse of, “associated enterprises”. The OECD Guidelines provided that two enterprises were “independent” if they were not “associated enterprises”. It followed therefore, in the applicant’s submission, that all and any attributes that give rise to entities being “associated” within the meaning of Art 9 must be disregarded in determining the attributes of the independent parties. Within Art 9 there were two conditions that could result in parties being regarded as associated. The first was participation by one entity in the management, control or capital of the other. Negating this attribute required one to ignore the parent-subsidiary relationship that in fact existed between CAHPL and CFC. The second condition of association was the same persons participating in the management, control or capital of the two enterprises. Negating this attribute required one to ignore the ownership by CVX of each of CAHPL and CFC. The terms of Art 9 thus required one to hypothesise a stand-alone borrower and a stand-alone lender. There was no room for implicit parental support which of necessity derived from the common owner, CVX. This was further confirmed in the OECD Guidelines, which said that Art 9 required one to treat members of a multi-national group as if they were operating as separate entities rather than part of a single “unified business”, and thus “attention is focused on the nature of the dealings between those members”.
The respondent submitted that while the transfer pricing rules required the affiliation between the parties to the transaction to be ignored, there was no warrant for ignoring the affiliation between a party to the transaction in question and other members of the group of companies of which it formed a part. To do so, the respondent submitted, would be contrary to the natural language of the relevant provisions, their judicial interpretation and the object and purpose of the transfer pricing rules. Each of the relevant provisions focused on the relationship between the parties to the relevant transaction.
While I accept the applicant’s submission that one must consider the conditions that one might expect to see between a lender and a borrower who are independent, and are dealing wholly independently with one another, which is the language of Art 9, it by no means follows that where, as here, the entities in question are sister companies, also to be eliminated is the relationship between each of them and their common parent on the basis that, otherwise, it could not be said that the lender and borrower were independent or were dealing independently. In my opinion, independent enterprises dealing wholly independently with one another may still be subsidiaries and may still have subsidiaries even if the enterprises are independent of each other. I therefore accept the respondent’s submission insofar as he contended that there was no legislative warrant for ignoring affiliation between a hypothesised party to a transaction and other members of that party’s group of companies. At the factual level, at [606] below, I have accepted the applicant’s submission as to implied parental support.
This conclusion means that the applicant’s high-level contention about “implicit support’ also fails. “Implicit support” may be generally relevant when assessing a borrower’s credit rating. The high-level contention fails because it relies on the proposition that the relationship between CAHPL and CVX and the relationship between CFC and CVX, CVX being the common parent, must be eliminated from the analysis.
The applicant’s submission that the existence and worth of “implicit support” is a matter of fact remains unaffected. I accept the applicant’s submission, that in the absence of a legally binding parental guarantee, implicit credit support had very little, if any, impact on pricing by a lender in the real world. This was the evidence of Mr Martin and Mr Gross and the conclusion of an article published in 2014 of which Mr Hollas was a joint author: “Intercompany Financial Transactions: Factors to Consider in Analysing the Impact of Implicit Parental Support”.
As to the applicant’s reliance on a differentiation between the language of “association” and “independence”, it seems to me that that distinction involves a non sequitur: to say that a party is independent of another party does not mean or require that either party is independent of all parties.
A further broad submission put by the applicant was that Art 9 mandated a determination of the “profits” which might have been expected “but for those conditions” and thus proceeded to consider a hypothetical situation in which commercial or financial relations take place, but absent the operation of the identified conditions. By its terms, the applicant submitted, Art 9 did not permit the addition of new “conditions” but was, instead, an “annihilation” provision.
In my opinion, the correct approach is to identify the conditions mentioned in Art 9 and then ask if there was an amount of profits which, but for those conditions, might have been expected to accrue to the entity but which has, by reason of those conditions, not so accrued: s 815-15(1)(c). As I have set out above at [27], Art 9 involves a comparison between, here, conditions which operate between CAHPL and CFC in their commercial or financial relations and whether those conditions differ from those conditions which might be expected to operate between independent enterprises dealing wholly independently with one another. It seems to me a distraction, in that context, to speak about “annihilation” provisions: conceptually the comparison between the actual conditions and the conditions which might be expected to operate between independent enterprises dealing wholly independently with one another is straightforward although its application may not be. In my opinion, nothing is “annihilated” but I accept that what must be compared are conditions which operate.
Once the approach I have outlined is borne in mind, in my view, the applicant’s submission: “By its terms [Art 9] does not permit the addition of new ‘conditions’” does not assist. It follows that I do not accept the applicant’s submission that “Article 9 negates non-arm’s length conditions but does not supply any condition which is absent and leaves the commercial or financial relations (as opposed to its terms) exactly as it finds it”. It follows that I reject the applicant’s submission that the “requirements” of Art 9 permit only an adjustment to the price of a transaction (in this case an adjustment to the rate of interest) for the purpose of determining the quantum of profits which might have been expected to accrue, and they might justify, but go no further than, the elimination of other terms or conditions upon which CFC lent to CAHPL. As I have said, in the present case Art 9 involves identifying conditions which operate between CAHPL and CFC in their commercial or financial relations and seeing where they differ from conditions which might be expected to operate between independent enterprises dealing wholly independently with one another.
It is necessary to return to the applicant’s submission, referred to at [589] above, that viewed in its totality, it cannot also be said that there were any profits which did not accrue to CAHPL in its commercial or financial relations with CFC and thus the requirements of Art 9 were not satisfied. The applicant’s submission was that CAHPL paid interest on the loan to CFC and received dividend income from CFC. The Commissioner ignored the dividend income CAHPL received in the years in dispute. It may be that the Commissioner overlooked the dividends received by CAHPL because he did not consider them to be “profits” of CAHPL for the purposes of Art 9. He may have read “profits” to mean “taxable income” because of s 3(2) of the International Tax Agreements Act, set out at [22] above.
The applicant submitted that the word “profits” where first appearing in Art 9 did not refer to taxable income, but profits in its more generic sense. The applicant submitted that this was supported by the history of Art 9. The reference to profits in this part of Art 9 was the same profit referred to in the old Art 5 of the 1933 Draft Convention for the Allocation of Business Income between States for the purposes of Taxation: it was a diverted profit which must be allocated to “one of the enterprises”. It would make no sense, the applicant submitted, to read the word “profits” in that phrase as meaning taxable income, as the enterprise which may get allocated those profits may not be resident in Australia. The profits which might be expected to accrue as mentioned in Art 9 were therefore to be taken to refer to profits generally. Once this condition of Art 9 was satisfied, namely that there were profits which might be expected to have accrued to one of the enterprises, the mechanism whereby such profits may be domestically taxed (i.e. included in the taxable income computation) followed in Art 9 with the concluding language of that Article: “may be included in the profits of that enterprise and taxed accordingly”. It followed that the profits of CAHPL included the dividends it had received from CFC for the purposes of the first condition in Art 9 relating to profits. In that respect, it could not be suggested that because of the conditions operating between CFC and CAHPL, “profits” did not accrue to CAHPL which should have. In other words, there had been no diversion of profits to CFC, and CAHPL’s expense, precisely because they had returned to CAHPL. The respondent Commissioner submitted that s 3(2) of the International Tax Agreements Act applied to the profits referred to in Art 9(1) and deemed them to be taxable income derived by CAHPL. Neither party referred to any authority on the point.
In my opinion, s 3(2) of the International Tax Agreements Act has a limited purpose, as set out in the explanatory memorandum to the Income Tax (International Agreements) Bill 1953, circulated by the Treasurer, the Rt. Hon. Sir Arthur Fadden:
The proposed sub-section (2.) is, subject to minor drafting variations, the same as the corresponding provision enacted in 1947 as sub-section (2.) of section 160F of the Assessment Act. Its purpose is to permit references in agreements to profits to be construed, unless the context requires otherwise, as references to taxable income. The provision is required because the Australian law imposes tax upon taxable income and not upon profits as such.
I do not, therefore, regard s 3(2) as having a substantive or deeming operation. The applicant’s argument based on the former Art 5 seems to me to be unnecessary to reach this conclusion which involves construing the different language of the present Art 9. It seems to me that the words “and taxed accordingly” are included in the text of Art 9(1) so as to make it clear what the relevant Contracting State may do. Section 815-15(1)(c) has effect accordingly. I am not, however, persuaded of the correctness of the applicant’s consequential argument that “profits” means that in the present case there can be a net profit position arising from the particular arrangements between the parties. What is being dealt with by Art 9 is profits which, but for the difference between the actual conditions operating and the conditions which might be expected to operate, have not accrued to, here, CAHPL. I therefore do not accept the applicant's submission that there were no profits which accrued to CAHPL.
Having rejected the applicant’s submissions, primarily submissions as to the proper construction of Art 9 and of Subdiv 815-A, and having considered at [505]-[524] above the evidence of the applicant’s main witnesses, I find that the requirements in the *associated enterprises article for the application of that article to CAHPL are met. I also accept the respondent’s submission identifying conditions, set out at [582] above. I find that but for the conditions operating between CAHPL and CFC which differ from those which might be expected to operate between independent parties dealing wholly independently with one another an amount of profits might be expected to have accrued but has not so accrued. It follows that the applicant has failed to show that the assessments under the ITAA 1997 were excessive. As I have said, my consideration of these matters is in the alternative to my conclusion as to the assessments made under Div 13 of the ITAA 1936.USD
Penalties
The applicant submitted that because CAHPL had obtained no “scheme benefit” it was not liable to an administrative penalty under either s 284-145(1) or s 284-145(2) of Sch 1 to the Taxation Administration Act. As set out at [15] above, the content of “scheme benefit” is given by s 284-150 in Sch 1 to the Taxation Administration Act which provided that an entity gets a scheme benefit from a scheme if a *tax-related liability of the entity for an accounting period is, or could reasonably be expected to be, less than it would be apart from the scheme or a part of the scheme.
The applicant submitted that if, contrary to its submissions, CAHPL did obtain a “scheme benefit”, no penalty was here payable pursuant to s 284-145(1) in Sch 1 to the Taxation Administration Act because it was not reasonable to conclude that CAHPL entered into the facility for the sole or dominant purpose of obtaining a “scheme benefit”.
The central provision of s 284-145 was as follows:
(1) You are liable to an administrative penalty if:
(a)you would, apart from a provision of a *taxation law or action taken under such a provision (the adjustment provision), get a *scheme benefit from a *scheme; and
(b)having regard to any relevant matters, it is reasonable to conclude that:
(i)an entity that (alone or with others) entered into or carried out the scheme, or part of it, did so with the sole or dominant purpose of that entity or another entity getting a scheme benefit from the scheme; …
The applicant submitted that it could not be reasonably concluded that CAHPL entered into the Credit Facility Agreement for the dominant purpose of obtaining a scheme benefit – its dominant purpose was to refinance its existing Australian dollar denominated debt. True it was, it obtained a deduction for interest incurred in respect of that debt. But that was a consequence of choosing to use debt funding. CAHPL’s choice to use such debt was lawful. It was permitted by Div 820, and was not impugned by the Commissioner.
The difference between the parties, the applicant submitted, was that the applicant relied upon the majority decision in Commissioner of Taxation (Cth) v Star City Pty Ltd (No 2) [2009] FCAFC 122; 180 FCR 448 for the proposition that a purpose had to be subjective, not objective.
The applicant submitted that by reason of s 815-10 of the Income Tax (Transitional Provisions) Act 1997, the penalty provisions in Subdiv 284-C in Sch 1 to the Taxation Administration Act – which included ss 284-145 and 284-150 – had no application. The respondent Commissioner agreed. Thus the only penalty that could arise would be by reference to Div 13.
The respondent Commissioner submitted that CAHPL would have obtained a “scheme benefit” because apart from the scheme, it was reasonable to expect that CAHPL would not deduct the interest under the Credit Facility Agreement but instead would have borrowed at an arm’s length interest rate and deducted that lower interest expense. Accordingly, its liability to income tax would be correspondingly greater.
The Commissioner further submitted that a reasonable person could conclude that each of CAHPL, CFC and CVX had the relevant dominant purpose. He submitted the factual context amply supported the drawing of such an inference. The matters pointed to by the Commissioner included:
(a)The objectives of the leveraging project as articulated by Mr Krattebol, global Treasurer of Chevron, were “to obtain the lowest cost of funding and achieve the Finance function’s merger synergy objectives”. Mr Dalzell acknowledged that the “merger synergy” objectives referred to by Mr Krattebol included the tax benefits that would arise from the gearing of the balance sheet of the Australasian Business Unit;
(b)Mr Lewis said in November 2002 that delays to the transaction meant “there is a real risk that we will not meet the Corporations merger synergy deadline” and that “we are chasing a merger synergy of around US$50MM per annum. Furthermore, we are leaving in excess of USD100,000 cash and earnings on the table each day that this transaction is delayed.” He also noted that one of the “benefits” of the CAHPL loan being in AUD was that it would “create an interest rate margin” which “would not be subject to tax in either the US … or Australia”. He also estimated that the USD commercial paper interest rate would be around 2% whereas the AUD interest rate payable by CAHPL would be around 8.5%;
(c)Mr Dalzell accepted that the merger synergy could be calculated by multiplying the interest rate margin (or uplift) earned by CFC each year by the Australian corporate tax rate of 30%, and accepted that a USD50 million merger synergy could only be achieved with an AUD interest rate whereas a USD interest rate would result in a USD30 million smaller merger synergy;
(d)The tax benefits of interest deductions for the CAHPL group were referred to on a number of occasions by officers of CVX;
(e)There was no bargaining or negotiation between CAHPL and CFC in relation to the Credit Facility Agreement.
As to the applicant’s submission that its dominant purpose was to refinance existing Australian dollar denominated debt, the Commissioner submitted that the purpose of refinancing would equally be achieved if CAHPL refinanced by borrowing at an arm’s length interest rate. It would also be achieved more cost effectively. Accordingly, refinancing could not be a purpose of CAHPL in entering into the scheme as opposed to borrowing at an arm’s length interest rate. It was not CAHPL’s choice of “debt funding” that gave rise to the relevant dominant purpose inference, it was its choice (and that of CFC and CVX) of an interest rate of AUD LIBOR +4.14%.
The respondent Commissioner did not dispute that the applicant had a reasonably arguable position.
In my opinion, which penalty rule applies depends on which transfer pricing rule is engaged, as in either case the Commissioner conceded that the position adopted was reasonably arguable. The matter for judgment therefore is whether the penalty of 25% has been made out, that is, the Commissioner’s position on purpose. If it has not, the penalty of 10% would apply, the applicant accepting that the conditions of s 284-145(2) in Sch 1 to the Taxation Administration Act are satisfied and the Commissioner agreeing that this subsection was satisfied if the purpose requirement of s 284-145(1)(b)(i) was not met.
I accept the respondent’s submission as to “scheme benefit”, that is, that apart from the scheme, it was reasonable to expect that CAHPL would not deduct the interest under the Credit Facility Agreement but instead would have borrowed at an arm’s length interest rate and deducted that lower interest expense. The question under s 284-145(1) is therefore whether, having regard to any relevant matters, it is reasonable to conclude that CAHPL (alone or with others) entered into or carried out the scheme, or part of it, with the dominant purpose of CAHPL getting a scheme benefit from the scheme.
In approaching the question of purpose I apply Commissioner of Taxation (Cth) v Ludekens [2013] FCAFC 100; 214 FCR 149 at [243]. There the Full Court said:
In assessing the purpose and evaluating its importance, and whether it is dominant, one must appreciate that it is the scheme in question to which the enquiry is directed, not a general state of affairs other than the scheme. Persons engaged in trade and commerce do so for personal gain. The purpose of all commercial arrangements is, in a broad sense, the making of profit: cf, by way of example, Federal Commissioner of Taxation v Hart (2004) 217 CLR 216 at [52] and the authorities cited and Federal Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 207 CLR 235 at [96]. Here the respondents undoubtedly wished to make profits from the purchase of woodlots and from running a foreign exchange business. They chose the Plan to effect that. Integral to the Plan was that the entities acquiring woodlots on 30 June 2007 … would obtain scheme benefits from the GST refunds from the purchase of the woodlots and that the Secondary Investors would obtain scheme benefits from tax deductions and tax refunds from their participation. Those are not two purposes: they comprise one purpose …
I do not accept the applicant’s submission that the end of the inquiry is that CAHPL’s dominant purpose was to refinance its existing Australian dollar denominated debt. I accept the Commissioner’s submission that refinancing was not the dominant purpose of the scheme as refinancing could be achieved by borrowing at an arm’s length interest rate which CAHPL did not. To limit the scope of matters to be taken into account merely to refinancing is artificially to exclude from consideration the circumstances of that refinancing.
In my opinion, it is reasonable to conclude that CAHPL entered into the Credit Facility Agreement for the dominant purpose of obtaining a “scheme benefit”. I refer to my conclusion in [628] above. Further, I rely on some of the factors pointed to by the Commissioner in this respect, those factors being: that the “merger synergy” objectives referred to by Mr Krattebol, the global treasurer of Chevron, included the tax benefits that would arise from the gearing of the balance sheet of the Australasian business unit; that delays to the transaction meant “there is a real risk that we will not meet the Corporations merger synergy deadline” and that:
we are chasing a merger synergy of around US$50MM million per annum. Furthermore, we are leaving in excess of USD100,000 of cash and earnings on the table each day that this transaction is delayed.
He also estimated that the USD commercial paper interest rate would be around 2% whereas the AUD interest rate payable by CAHPL would be around 8.5%. I also rely on the evidence of Mr Lewis set out at [104] above and the evidence of Mr Dalzell set out at [121] above.
I add that, contrary to the respondent’s submission set out at [622] above, I do not regard Star City Pty Ltd (No 2) as standing for the proposition that the relevant approach is that a reasonable person could conclude that each of CAHPL, CFC and CVX had the relevant dominant purpose: compare Star City Pty Ltd (No 2) at [74] per Dowsett J. I prefer directly to apply the statutory language, which raises the issue whether it is reasonable to conclude that an entity that (alone or with others) entered into or carried out the scheme, or part of it, did so with the sole or dominant purpose of that entity or another entity getting a scheme benefit from the scheme. By reason of that statutory language, I do not accept that the question is solely subjective but I do accept that the purpose of the entity is its subjective purpose: see Star City Pty Ltd (No 2) at [31]-[32] per Goldberg and Jessup JJ and Ludekens at [243] which I have set out at [627] above.
For these reasons, I find the penalty is 25% of the scheme shortfall amount, pursuant to s 284-160(a)(ii).
Rulings on evidence
There were a number of deferred rulings on objections to evidence on the ground of relevance. It will be apparent from these reasons which affidavits and reports I have found not to be relevant. I do not see it as necessary formally to rule on the balance of these objections as they turn on issues of statutory construction.
Orders
I shall direct that, within 21 days, the parties bring in agreed short minutes to give effect to my conclusions. Those short minutes are also to deal with costs. Failing agreement, within a further 7 days the parties are to file the competing orders for which they contend and any written submissions in support, the submissions on each side to be limited to three pages.
I certify that the preceding six hundred and thirty-three (633) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Robertson. Associate:
Dated: 23 October 2015
- AGLC
- Chevron Australia Holdings Pty Ltd v Commissioner of Taxation (No 4) [2015] FCA 1092
- Case
- [2015] FCA 1092
- Decision Date
CaseChat Overview and Summary
The court examined whether the challenged sections of the Income Tax Assessment Act 1997 (Cth) were retrospective and whether they imposed an arbitrary exaction. It was argued that if the sections were retrospective, they would contravene the Constitution by imposing an arbitrary exaction, as they did not conform to the description of a law with respect to taxation. Additionally, the court considered the application of Division 13 of Part III of the Income Tax Assessment Act 1936 (Cth) and its interaction with Subdivision 815-A of the Income Tax Assessment Act 1997 (Cth) concerning international agreements and associated enterprises.
The court found that the sections were not retrospective and did not impose an arbitrary exaction. It held that the provisions were designed to ensure that transactions between associated enterprises were assessed at arm’s length, thereby preventing the artificial reduction of taxable income. The court also concluded that the provisions were consistent with the principles of international tax law, including the double taxation treaty between Australia and the United States of America. Consequently, the Commissioner's assessment was upheld.
The court ordered that within 21 days, the parties were to bring in agreed short minutes to give effect to the court's conclusions. Additionally, if the parties could not agree, they were to file competing orders and written submissions within a further 7 days, limited to 3 pages each. The court also directed that these short minutes address the costs of the proceedings.
Orders
Orders of the court
1. Within 21 days, the parties bring in agreed short minutes to give effect to these reasons. Those short minutes are also to deal with costs.
2. Failing agreement, within a further 7 days the parties are to file the competing orders for which they contend and any written submissions in support, the submissions on each side to be limited to 3 pages.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
Background
Background to the litigation
Full text does not contain this section.
Evidence
Evidence Before The Court
Decision
Reasons for decision
Full text does not contain this section.
Ratio Decidendi
Legal Principle Established
Section 136AD of the ITAA 1936, so far as relevant, was in the following terms. 136AD Arm’s length consideration deemed to be received or given…(3) Where:(a) a taxpayer has acquired property under an international agreement;(b)the Commissioner, having regard to any connection between any 2 or more of the parties to the agreement or to any other relevant circumstances, is satisfied that the parties to the agreement, or any 2 or more of those parties, were not dealing at arm’s length with each other in relation to the acquisition;(c)the taxpayer gave or agreed to give consideration in respect of the acquisition and the amount of that consideration exceeded the arm’s length consideration in respect of the acquisition; and(d)the Commissioner determines that this subsection should apply in relation to the taxpayer in relation to the acquisition;then, for all purposes of the application of this Act in relation to the taxpayer, consideration equal to the arm’s length consideration in respect of the acquisition shall be deemed to be the consideration given or agreed to be given by the taxpayer in respect of the acquisition.(4)For the purposes of this section, where, for any reason (including an insufficiency of information available to the Commissioner), it is not possible or not practicable for the Commissioner to ascertain the arm’s length consideration in respect of the supply or acquisition of property, the arm’s length consideration in respect of the supply or acquisition shall be deemed to be such amount as the Commissioner determines.Section 136AD(4) is reproduced to provide statutory context for the interpretation of the balance of the provision. No determination under that provision relevant to these proceedings was made by the Commissioner. Relevant definitions were set out in s 136AA of the ITAA 1936, as follows.(1)In this Division, unless the contrary intention appears:acquire includes:(a)acquire by way of purchase, exchange, lease, hire or hire-purchase; and(b) obtain, gain or receive.agreement means any agreement, arrangement, transaction, understanding or scheme, whether formal or informal, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings.…property includes:(a) a chose in action;(b)any estate, interest, right or power, whether at law or in equity, in or over property;(c) any right to receive income; and(d) services.…services includes any rights, benefits, privileges or facilities and, without limiting the generality of the foregoing, includes the rights, benefits, privileges or facilities that are, or are to be, provided, granted or conferred under:(a) an agreement for or in relation to:(i)the performance of work (including work of a professional nature);(ii) the provision of, or the use or enjoyment of facilities for, amusement, entertainment, recreation or instruction;(iii)the conferring of rights, benefits or privileges for which consideration is payable in the form of a royalty, tribute, levy or similar exaction; or(iv) the carriage, storage or packaging of any property or the doing of any other act in relation to property;(b) an agreement of insurance;(c)an agreement between a banker and a customer of the banker entered into in the course of the carrying on by the banker of the business of banking; or(d) an agreement for or in relation to the lending of moneys.…(3) In this Division, unless the contrary intention appears:(a)a reference to the supply or acquisition of property includes a reference to agreeing to supply or acquire property;(b)a reference to consideration includes a reference to property supplied or acquired as consideration and a reference to the amount of any such consideration is a reference to the value of the property;(c)a reference to the arm’s length consideration in respect of the supply of property is a reference to the consideration that might reasonably be expected to have been received or receivable as consideration in respect of the supply if the property had been supplied under an agreement between independent parties dealing at arm’s length with each other in relation to the supply;(d)a reference to the arm’s length consideration in respect of the acquisition of property is a reference to the consideration that might reasonably be expected to have been given or agreed to be given in respect of the acquisition if the property had been acquired under an agreement between independent parties dealing at arm’s length with each other in relation to the acquisition; and(e)a reference to the supply or acquisition of property under an agreement includes a reference to the supply or acquisition of property in connection with an agreement.