Mylan Australia Holding Pty Ltd v Commissioner of Taxation (No 2)

[2024] FCA 253

FEDERAL COURT OF AUSTRALIA

Mylan Australia Holding Pty Ltd v Commissioner of Taxation (No 2) [2024] FCA 253  

File number(s):

VID 770 of 2021
VID 526 of 2022

Judgment of:

BUTTON J

Date of judgment:

20 March 2024

Catchwords:

TAXATION – income tax – interest deductions – schemes to which Pt IVA of the Income Tax Assessment Act 1936 (Cth) applies – where Applicant’s ultimate parent company acquired global pharmaceutical business – where Applicant is the head of a tax consolidated group of entities incorporated in Australia to acquire the Australian target – where Australian acquirer (MAPL) capitalised with a mix of intragroup debt and equity – where Applicant claimed deductions for interest expenses incurred by MAPL under intercompany promissory notes – where Commissioner of Taxation issued determinations under s 177F disallowing the deductions and consequential carry forward losses – whether Applicant obtained a tax benefit in connection with a scheme to which Pt IVA applies – whether tax benefit required to be anticipated at time scheme entered into – where, objectively assessed, the deductions allowable under the preferred counterfactual would have been less than the deductions obtained under the schemes – where the Applicant obtained a tax benefit within the meaning of s 177C – whether the scheme was entered into or carried out for the dominant purpose of obtaining that tax benefit – consideration of the factors set out in s 177D(b) – where obtaining a tax benefit was not the ruling, prevailing, or most influential purpose – where the assessments issued by the Commissioner of Taxation were excessive

TAXATION – validity of determinations and assessments – whether Court permitted to remit the matter to the Commissioner for fresh determinations based on the Court’s findings – whether assessments consistent in all material respects with the postulate upon which underlying determinations made – application of the decision in Channel Pastoral Holdings v Federal Commissioner of Taxation (2015) 232 FCR 162; [2015] FCAFC 57 – points not necessary to be decided

Legislation:

Federal Court of Australia Act 1976 (Cth) ss 37M, 37N

Income Tax Assessment Act 1936 (Cth) ss 23, 128F, 169A, 177A, 177C, 177D, 177F

Income Tax Assessment Act 1997 (Cth) Pt 3-90

Income Tax Laws Amendment Bill (No 2) 1981 (Cth)

Tax and Superannuation Laws Amendment (2014 Measures No. 4) Act 2014 (Cth) Pt 1, Sch 1

Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Act 2013 (Cth)

Taxation Administration Act 1953 (Cth) ss 14ZZO, 14ZZP, 14ZZQ

Taxation Laws Amendment Act 1986 (Cth) s 19

Cases cited:

Channel Pastoral Holdings Pty Ltd v Federal Commissioner of Taxation (2015) 232 FCR 162; [2015] FCAFC 57

Commissioner of Taxation v Peabody (1994) 181 CLR 359

CPH Property Pty Ltd v Federal Commissioner of Taxation (1998) 88 FCR 21

Deputy Commissioner of Taxation (Cth) v Richard Walter Pty Ltd (1995) 183 CLR 168

Epov v Federal Commissioner of Taxation (2007) 65 ATR 399; [2007] FCA 34

Federal Commissioner of Taxation v Ashwick (Qld) No 127 Pty Ltd (2011) 192 FCR 325; [2011] FCAFC 49

Federal Commissioner of Taxation v AXA Asia Pacific Holdings Ltd (2010) 189 FCR 204; [2010] FCAFC 134

Federal Commissioner of Taxation v Consolidated Press Holdings Limited (2001) 207 CLR 235

Federal Commissioner of Taxation v Futuris Corporation Ltd (2012) 205 FCR 274; [2012] FCAFC 32

Federal Commissioner of Taxation v Guardian AIT Pty Ltd ATF Australian Investment Trust (2023) 115 ATR 316; [2023] FCAFC 3

Federal Commissioner of Taxation v Hart (2004) 217 CLR 216

Federal Commissioner of Taxation v Jackson (1990) 27 FCR 1

Federal Commissioner of Taxation v Lenzo (2008) 167 FCR 255; [2008] FCAFC 50

Federal Commissioner of Taxation v Macquarie Bank Ltd (2013) 210 FCR 164; [2013] FCAFC 13

Federal Commissioner of Taxation v Sleight (2004) 136 FCR 211; [2004] FCAFC 94

Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404

Federal Commissioner of Taxation v Trail Bros Steel & Plastics Pty Ltd (2010) 186 FCR 410; [2010] FCAFC 94

Federal Commissioner of Taxation v Trail Bros Steel & Plastics Pty Ltd (2009) 75 ATR 916; [2009] FCA 1210

Futuris Corporation Ltd v Federal Commissioner of Taxation (2010) ATC ¶20-206

Jackson v Federal Commissioner of Taxation (1989) 87 ALR 461

Macquarie Bank Ltd v Federal Commissioner of Taxation (2011) 85 ATR 409; [2011] FCA 1076

Macquarie Finance Ltd v Federal Commissioner of Taxation (2005) 146 FCR 77; [2005] FCAFC 205

Metal Manufactures Ltd v Federal Commissioner of Taxation (1999) 43 ATR 375; [1999] FCA 1712

Mills v Commissioner of Taxation (2012) 250 CLR 171

Minerva Financial Group Pty Ltd v Commissioner of Taxation [2024] FCAFC 28

Noza Holdings Pty Ltd v Federal Commissioner of Taxation (2011) 82 ATR 338; [2011] FCA 46

RCI Pty Ltd v Federal Commissioner of Taxation (2011) 84 ATR 785; [2011] FCAFC 104

Singapore Telecom Australia Investments Pty Ltd v Commissioner of Taxation [2024] FCAFC 29

WR Carpenter Holdings Pty Ltd v Federal Commissioner of Taxation (2007) 161 FCR 1; [2007] FCAFC 103

Commissioner of Internal Revenue v Brown (1965) 380 US 536

Division:

General Division

Registry:

Victoria

National Practice Area:

Taxation

Number of paragraphs:

604

Date of hearing:

9 – 25 October 2023

Counsel for the Applicant:

J W de Wijn KC with E Wheelahan KC, A Roe and C Horan

Solicitor for the Applicant: 

MinterEllison

Counsel for the Respondent:

S Sharpley KC with C M Pierce, N Li and A Haskett

Solicitor for the Respondent: 

Norton Rose Fulbright

ORDERS

VID 770 of 2021
VID 526 of 2022

BETWEEN:

MYLAN AUSTRALIA HOLDING PTY LTD

Applicant

AND:

COMMISSIONER OF TAXATION

Respondent

ORDER MADE BY:	BUTTON J
DATE OF ORDER:	20 MARCH 2024

THE COURT ORDERS THAT:

1.By 27 March 2024, the parties provide draft orders to chambers giving effect to these reasons.

2.If the parties disagree as to the appropriate outcome as to costs, each party must file and serve any submissions on costs (limited to four pages) by 27 March 2024, with any responsive submissions (limited to two pages) by 29 March 2024.

Note:   Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

INTRODUCTION	[1]
THE EVIDENCE	[11]
THE LEGISLATIVE SCHEME	[26]
FACTS	[34]
MAHPL	[42]
Mylan	[43]
Merck, MGGBV and Alphapharm	[47]
Bid to acquire Merck Generics	[52]
Share Purchase Agreement	[59]
Acquisition structuring	[70]
Execution of the Amended SPA	[114]
Acquisition financing – debt	[117]
Credit ratings and engagement with ratings agencies	[137]
Summary of gearing figures recorded in different presentations	[148]
Expected repatriation of funds and the OFL position	[150]
Implementation of the Acquisition – Australia	[161]
Implementation of the Acquisition in other jurisdictions	[176]
Acquisition financing – equity raising	[178]
Interest rate swaps	[188]
Post-acquisition steps – Australia	[195]
Valuations of Merck Generics	[199]
Fixing of the interest charged under, and subsequent formal amendment of, PN A1 and PN A2	[200]
Alphapharm’s performance	[213]
Interest paid under PN A2	[214]
Issue of PN A4 and retirement of PN A2 in 2014, retirement of PN A4 in 2017	[218]
THE SCHEMES AND THE COUNTERFACTUALS	[222]
The wider scheme and primary counterfactual	[222]
The narrower scheme and secondary and tertiary counterfactuals	[224]
MAHPL’s counterfactuals	[227]
Schemes not in issue	[231]
TAX BENEFIT	[232]
The proper approach on the authorities	[232]
MAHPL’s submission on the need to be able to anticipate a tax benefit as at the time of entry into the scheme	[241]
TAX BENEFIT: CONSIDERATION	[249]
Tax Benefit	[249]
The primary counterfactual	[251]
Debt and equity	[254]
Repatriation of free cash flow	[267]
Mylan’s OFL position and foreign tax credits	[289]
Conclusion on the primary counterfactual	[297]
Other counterfactuals	[302]
Debt to equity ratio	[309]
Capitalisation of interest	[318]
Internal or external lender	[324]
The quantum of the counterfactual loan	[338]
Interest: Fixed or floating borrowing	[364]
Fixing floating rate exposure of MAPL	[368]
Capitalising interest	[379]
Amortisation of principal	[382]
Effective interest rates	[386]
Guarantees	[389]
Conclusion on the counterfactual to be adopted	[392]
Conclusion on “tax benefit”	[397]
WHETHER THE PREFERRED COUNTERFACTUAL IS ITSELF A PART IVA SCHEME?	[401]
DOMINANT PURPOSE	[403]
The proper approach on the authorities	[404]
DOMINANT PURPOSE: CONSIDERATION	[421]
Section 177D(b) factors	[429]
(i) The manner in which the scheme was entered into and carried out	[429]
Incorporation of MAPL and MAHPL and the choice to form a tax consolidated group with MAHPL as the head entity	[431]
Commercial factors	[433]
Structuring of the transaction and changes to the SPA	[441]
Quantum of debt and the thin capitalisation limits	[456]
Fixing the interest rate	[476]
Other terms of the borrowing	[507]
Failure to refinance	[513]
Other alternatives	[520]
Other points	[527]
Overall view on “manner”	[531]
(ii)           The form and substance of the scheme	[532]
(iii)          The time that the scheme was entered into and the length of the period during which the scheme was carried out	[541]
(iv)          The result in relation to the operation of the Act that, but for this part, would be achieved by the Scheme	[544]
(v) to (vii)           Changes to the financial position of the relevant taxpayer or any other person connected with the relevant taxpayer, that has resulted, will result, or may reasonably be expected to result, from the scheme, and any other consequences of the scheme for those persons	[547]
MAHPL’s financial position	[547]
Changes to the financial position of other persons with a connection with MAHPL	[551]
Whether the scheme involved a “double deduction”	[552]
Reduction of Australian tax as a means to address the consequences of Mylan’s OFL	[555]
Any other consequence for the relevant taxpayer or persons referred to in s 177D(b)(vi)	[562]
(viii)        The nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi)	[564]
Conclusions on dominant purpose	[572]
CARRY FORWARD LOSSES	[575]
SHORTFALL INTEREST CHARGE	[577]
REMITTER AND FURTHER DETERMINATIONS	[579]
CHANNEL PASTORAL ARGUMENT	[594]
CONCLUSION	[604]

BUTTON J:

INTRODUCTION

1. The Applicant, Mylan Australia Holding Pty Ltd (MAHPL), brought two proceedings against the Respondent, the Commissioner of Taxation (the Commissioner) under Pt IVC of the Taxation Administration Act 1953 (Cth) (the TAA). By determinations issued under s 177F of the Income Tax Assessment Act 1936 (Cth) (the ITAA36), the Commissioner disallowed MAHPL’s deductions for interest expenses under an intercompany promissory note referred to as PN A2, and consequential carry forward losses. PN A2 had flexible terms, permitting interest to be capitalised and allowing the prepayment of principal without penalty. The deductions for interest claimed by MAHPL also reflected the fixed interest rate that was determined (exactly when was in dispute) to apply to PN A2.

2. The Commissioner issued amended assessments for the income years ending 31 December 2009 to 31 December 2020.

3. MAHPL is the head company of a tax consolidated group, which includes Mylan Australia Pty Ltd (MAPL). MAHPL is the immediate parent company of MAPL. The ultimate holding company of MAPL and MAHPL is Mylan Inc (formerly known as Mylan Laboratories Inc) (Mylan). Mylan is the head of the Mylan group of companies.

4. MAPL acquired all of the shares in Alphapharm Pty Ltd (Alphapharm) in October 2007. Alphapharm was one of the operating subsidiaries of Merck KgaA (Merck) which, together with its related entities, carried on a global generics pharmaceutical business (Merck Generics). Merck Generics was acquired by members of the Mylan group in October 2007. The acquisition was a USD 7 billion transaction. The proceedings concern the application of Pt IVA of the ITAA36 to the funding arrangements associated with MAPL’s acquisition of the shares in Alphapharm. In short, MAPL was funded with a mix of interest-bearing debt and equity at a 3:1 ratio. The debt component was constituted by PN A2, issued by MAPL to Mylan Luxembourg 1 S.a.r.l. (Lux 1). As its name suggests, Lux 1 was a Luxembourg company.

5. In applying Pt IVA, the Commissioner identified a wider scheme (also referred to as the primary scheme), and a narrower scheme (also referred to as the secondary and tertiary schemes — the secondary and tertiary schemes being identical).

6. The Commissioner considered that the entry into the wider scheme (which included the incorporation of the local Australian holding company structure (MAPL and MAHPL)) generated a tax benefit, being all the interest deductions on PN A2 (and a subsequent note, entered into in 2014, referred to as PN A4). This was on the basis of the Commissioner’s view that, had the wider scheme not been pursued, the shares in Alphapharm would not have been separately acquired through a local Australian holding company structure. Rather, Alphapharm would have remained a subsidiary of the Netherlands company, Merck Generics Group B.V. (MGGBV) and would have become part of the Mylan group with the acquisition of MGGBV. In this scenario (described as the primary counterfactual), MAPL would not have acquired the shares in Alphapharm and would not have incurred interest expenses under PN A2.

7. At the objection stage, the Commissioner identified the narrower scheme, and developed two alternate counterfactuals (being the secondary counterfactual and the tertiary counterfactual). The narrower scheme does not include the establishment of the Australian holding company structure with MAHPL as the head entity. According to the counterfactuals the Commissioner developed in respect of the narrower scheme, MAPL and MAHPL would still have been incorporated and MAPL would still have acquired the shares in Alphapharm but, on the secondary counterfactual, MAPL would have borrowed a lesser sum (ie it would have had a lower gearing ratio) and would have borrowed under the same facility that Mylan and another group company in fact borrowed to fund the Merck Generics acquisition (ie MAPL would have taken on external debt at a floating rate). The tertiary counterfactual was the same, save that it posited the lender being Mylan or another US subsidiary of Mylan.

8. Although entry into PN A4 formed part of the wider and narrower schemes, the Commissioner did not take issue with the terms on which PN A4 was issued. Rather, his case was that, on the primary counterfactual MAPL would not have incurred any debt, therefore there would have been nothing to refinance and PN A4 would not have come into existence. How PN A4 featured in the secondary and tertiary counterfactuals was not clear. I can only assume that, by parity of reasoning, the deductions obtained as a result of the interest incurred under PN A4 was only contended to form part of the tax benefit to the extent that, on either of those counterfactuals, a different (and lesser) amount would have been refinanced by PN A4, with lower associated deductions for interest.

9. Initially, the Commissioner also defended his amended assessments on transfer pricing grounds, but dropped that part of his case before trial. Accordingly, the matter went to trial only on the Pt IVA issue (and some minor issues whose outcome rested on the determination of the Pt IVA case).

10. The conclusions I have reached on the principal issues are as follows:

    (a)MAHPL did not obtain a tax benefit in connection with the primary scheme that may be calculated by reference to the primary counterfactual;

    (b)had none of the schemes been entered into or carried out, the most reliable — and a sufficiently reliable — prediction of what would have occurred is what I have termed the “preferred counterfactual”;

    (c)the principal integers of the preferred counterfactual are as follows:

    (i)MAPL would have borrowed the equivalent of AUD 785,329,802.60 on 7 year terms under the SCA (specifically the term applying to Tranche B), at a floating rate consistent with the rates specified in the SCA;

    (ii)MAPL would otherwise have been equity funded to the extent necessary to fund the initial purchase of Alphapharm and to stay within the thin capitalisation safe harbour ratio from time to time;

    (iii)Mylan would have guaranteed MAPL’s borrowing under the SCA;

    (iv)Mylan would not have charged MAPL a guarantee fee;

    (v)interest on the borrowing would not have been capitalised;

    (vi)MAPL would have been required to pay down the principal on a schedule consistent with that specified in the SCA and would have made voluntary repayments to reduce its debt as necessary to stay within the thin capitalisation safe harbour, from time to time;

    (vii)MAPL would not have taken out hedges to fix some or all of its interest rate expense;

    (viii)MAPL would have taken out cross-currency swaps into AUD at an annual cost of 3.81% per annum over AUD 3 month BBSW; and

    (ix)if MAPL’s cashflow was insufficient to meet its interest or principal repayment obligations, Mylan would have had another group company loan MAPL the funds necessary to avoid it defaulting on its obligations, resulting in MAPL owing those funds to that related company lender by way of an intercompany loan, accruing interest at an arm’s length rate;

    (d)MAHPL did (subject to matters of calculation) obtain a tax benefit in connection with the schemes, being the difference between the deductions for interest obtained in fact, and the deductions for interest that would be expected to be allowed on the preferred counterfactual; and

    (e)MAHPL has discharged its onus in relation to the dominant purpose enquiry specified by s 177D of the ITAA36 and so has established that the assessments issued to it were excessive.

    THE EVIDENCE

11. The parties tendered a substantial number of documents at trial. Following the conclusion of the trial, the parties marked up versions of the indexes to the Court Book and the Supplementary Court Book, striking out documents that were not referred to at trial (and were therefore not treated as having been tendered). The parties also prepared a Second Supplementary Court Book, all of which was referred to at trial (such that there was no need to prepare a marked up index of that court book).

12. There was limited lay evidence. MAHPL read the following affidavits of lay witnesses:

    (a)an affidavit of Paul Campbell dated 4 August 2022;

    (b)an affidavit of Thomas Salus dated 23 August 2023; and

    (c)a further affidavit of Thomas Salus dated 20 October 2023.

13. Mr Campbell is the Senior Vice President, Controller and Chief Accounting Officer at Viatris Inc, the present ultimate parent of MAHPL. In 2007, Mr Campbell was Mylan’s Vice President Corporate Accounting and Reporting, Business Development, Strategic Development. His responsibilities were mainly focused on accounting, finance business development activities, purchase accounting for acquisitions and preparation of consolidated financial statements. Mr Campbell gave some very limited evidence concerning the acquisition of the Merck Generics business. He deposed to Mylan having completed the acquisition in accordance with version 17 of a “step plan” prepared by Mylan’s advisors.

1. Mr Salus is the Assistant Secretary of Viatris Inc, and the Deputy Global General Counsel of Mylan. Mr Salus’s August 2023 affidavit set out the names of individuals employed in various roles and when they were last employed by any member of the Mylan group. This evidence was to the effect that, the CFO, two treasurers, the Vice President Tax, the Director – International Tax and various others, had all left the employ of members of the Mylan group years prior to the present litigation.

2. Mr Salus’s October 2023 affidavit is addressed in more detail below. It produced documents that relate to when the interest rate on PN A2 was fixed and when intercompany accruals reflecting the fixed rate, were effected.

3. Mr Campbell and Mr Salus were not cross examined. MAHPL also relied on an affidavit of its solicitor Daniel James Slater dated 2 May 2023 (sworn in connection with a pre-trial discovery application) in relation to some points concerning what documentation had been produced to the Commissioner, and when such documentation was produced.

4. The parties also relied on reports of experts.

5. The Commissioner and MAHPL each called an expert on US tax law. The Commissioner relied on an expert report of Harry David Rosenbloom dated 28 November 2022, an attorney engaged in private practice and a visiting professor of law at New York University School of Law. MAHPL relied on two reports of Kevin Glenn dated 2 August 2022 and 10 April 2023. Mr Glenn is a practising attorney at law and a partner of DLA Piper LLP (US). Prof Rosenbloom and Mr Glenn prepared a joint expert report, which was also tendered at trial, dated 16 June 2023.

6. Mr Glenn and Prof Rosenbloom both gave evidence and were cross-examined.

7. MAHPL also called evidence from two further experts: Terence Stack, and Mozammel Ali. Mr Ali is a financial markets expert, and is the Managing Director of Theorem Consulting PtyLtd, a firm specialising in advising on mergers and acquisitions, acquisition financing, capital raisings and capital structuring. Mr Ali prepared two reports: dated 10 August 2022, and 9 April 2023. Mr Stack is an expert in corporate treasury functions, including in relation to capital structuring, capital allocation, debt and equity market transactions, financial market risk management, liquidity management and related matters. Mr Stack prepared two reports: dated 5 August 2022 and 8 April 2023.

8. The Commissioner called expert evidence from Gregory Johnson. Mr Johnson is a capital markets expert and is the Managing Director of Global Capital Advisors LLC. He prepared a report dated 12 February 2023.

9. Mr Stack, Mr Ali and Mr Johnson prepared a joint expert report, which was tendered at trial, dated 18 July 2023.

10. Mr Stack and Mr Ali also participated in the preparation of a further joint expert report, dated 18 July 2023, along with David Bernard. Mr Bernard had been retained by the Commissioner, and had prepared a report. However, the Commissioner determined not to rely on his evidence at trial. Nevertheless, and as the joint expert report involving Mr Bernard contained material on which MAHPL wished to rely even though Mr Bernard was not being called, a redacted version of that report was tendered at trial.

11. Mr Stack, Mr Ali and Mr Johnson all gave evidence at trial and were cross-examined.

12. All of the experts were amply qualified to give opinion evidence on the topics covered by their reports.

    THE LEGISLATIVE SCHEME

13. The parties jointly put forward, as the version of Pt IVA of the ITAA36 according to which the issues arising are to be determined, the version operative from 1 October 2007 to 31 December 2007. Relevant extracts were provided by the joint book of authorities.

14. This proceeding falls to be determined under the “old” Pt IVA regime, being the provisions in place prior to the amendments introduced by the Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Act 2013 (Cth).

15. Section 177F provided for the making of determinations to disallow tax benefits. Section 177F(1)(b) provided as follows in the applicable version of Pt IVA:

    (1)Where a tax benefit has been obtained, or would but for this section be obtained, by a taxpayer in connection with a scheme to which this Part applies, the Commissioner may:

    ...

    (b)in the case of a tax benefit that is referable to a deduction or a part of a deduction being allowable to the taxpayer in relation to a year of income—determine that the whole or a part of the deduction or of the part of the deduction, as the case may be, shall not be allowable to the taxpayer in relation to that year of income;

16. As may be seen, the key concepts are the existence of a “tax benefit” obtained in connection with a “scheme” to which Pt IVA applies.

17. The term “scheme” was broadly defined by s 177A(1) and (3), as follows:

    scheme means:

    (a)any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and

    (b) any scheme, plan, proposal, action, course of action or course of conduct.

    ...

    (3)The reference in the definition of scheme in subsection (1) to a scheme, plan, proposal, action, course of action or course of conduct shall be read as including a reference to a unilateral scheme, plan, proposal, action, course of action or course of conduct, as the case may be.

18. Section 177C governs determination of whether a taxpayer has obtained a “tax benefit in connection with a scheme”, and the amount of the tax benefit. Sections 177C(1)(b) and (d) provided as follows in relation to deductions:

    (1) Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to:

    ...

    (b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out;

    ...

    and, for the purposes of this Part, the amount of the tax benefit shall be taken to be:

    ...

    (d)in a case to which paragraph (b) applies—the amount of the whole of the deduction or of the part of the deduction, as the case may be, referred to in that paragraph;    

19. Section 177D provided for Pt IVA to apply only to some schemes. Relevantly, it provided that Pt IVA applies only to schemes entered into with the requisite purpose (objectively determined):

    This Part applies to any scheme that has been or is entered into after 27 May 1981, and to any scheme that has been or is carried out or commenced to be carried out after that date (other than a scheme that was entered into on or before that date), whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia, where:

    (a)a taxpayer (in this section referred to as the relevant taxpayer) has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and

    (b)having regard to:

    (i)the manner in which the scheme was entered into or carried out;

    (ii)the form and substance of the scheme;

    (iii)the time at which the scheme was entered into and the length of the period during which the scheme was carried out;

    (iv)the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;

    (v)any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;

    (vi)any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;

    (vii)any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and

    (viii)the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi);

    it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers).

    (Emphasis added.)

20. The concept of the “purpose” behind entry into the scheme was elaborated upon by s 177A(5), which provided that:

    A reference in this Part to a scheme or a part of a scheme being entered into or carried out by a person for a particular purpose shall be read as including a reference to the scheme or the part of the scheme being entered into or carried out by the person for 2 or more purposes of which that particular purpose is the dominant purpose.

    FACTS

21. While some very limited lay evidence was given by affidavit, the factual dimensions of the case were entirely documentary. In its opening submissions, MAHPL set out an account of the facts by reference to the documents. Its account was, very substantially, couched in neutral terms; the account of the facts was not used as an opportunity for advocacy. In his opening submissions, the Commissioner addressed the factual background in one paragraph:

    The Commissioner apprehends MAHPL’s statement of material facts at AS1 [12]-[58], [65]-[107] to be broadly accurate. The weight to be given to any particular fact, and the inferences that may be drawn from such facts, are likely to turn on the evidence given at trial and will therefore be addressed by the Commissioner in closing. 

22. In view of the Commissioner’s acceptance that MAHPL’s account of the facts was “broadly accurate”, in the course of opening submissions, I requested that the Commissioner detail any respect in which he contended the narrative was inaccurate. I also requested, noting the paragraphs carved out of the Commissioner’s concession, that the Commissioner “be a bit more granular about what it is about those paragraphs that [he did not] accept”. The Commissioner then sent a letter to MAHPL dated 18 October 2023, a copy of which was provided to the Court. The letter stated, in respect of wide ranges of paragraphs in MAHPL’s written opening submissions, that the Commissioner “put [MAHPL] to proof”. This entirely unhelpful response was staunchly defended by counsel for the Commissioner on the basis that the taxpayer has the onus of proof and had chosen not to call lay evidence. Ultimately, on 19 October 2023, a somewhat more helpful document was provided by the Commissioner, which set out the basis for the Commissioner’s “non-admission” (as it was characterised in the Commissioner’s letter) of certain facts.

23. I will not dwell on this episode further, save to observe that the taxpayer’s onus in Pt IVC appeals does not absolve the Commissioner of his obligations under s 37N of the Federal Court of Australia Act 1976 (Cth) to conduct the proceeding in a way that is consistent with the overarching purpose. The overarching purpose includes the resolution of disputes as quickly, inexpensively and efficiently as possible, and the efficient use of the judicial and administrative resources of the Court (s 37M). I would not have thought that asking a litigant to identify with some specificity the respects in which it does not accept, or wishes to supplement, the document-based factual summary of his opponent is straining at the edges of the obligation of a litigant to conduct the proceeding in a way that is consistent with the overarching purpose.

24. Somewhat surprisingly, in view of the contents of its written opening and the interactions referred to above, the Commissioner’s closing submissions contained an annexure — which ran to more than 30 pages and whose delivery had not been foreshadowed — setting out the facts.

25. Nevertheless, the Commissioner’s factual narrative did not differ significantly from the factual narrative presented by MAHPL in opening. The main factual matters on which the parties differed concerned: whether or not Mylan had settled on an acquisition structure when it initially signed the SPA; whether or not Mylan intended that 100% of free cash flow would be repatriated; and when the interest rate on PN A2 was in fact fixed and retroactively applied.

26. Given the very limited compass of the divergence in views of the facts and the documentary source of the factual narratives, what follows is an account of the facts that, in part, reproduces and expands upon the parties’ accounts of the facts. MAHPL’s account in opening constitutes the base, but significant additional facts that were included by the Commissioner in his account in closing, but omitted from MAHPL’s account, have been incorporated. Most of the additional facts addressed in the Commissioner’s factual summary, but not in MAHPL’s summary in opening, concern what the Commissioner characterised as the “debt pushdown” (viz, the creation of intercompany debt at the MAPL level). In their respective narratives, the parties highlighted different aspects of some documents. In the setting out the factual summary below, I have had regard to those differences of emphasis or construction. I have also had regard to, and included, factual matters canvassed in oral submissions, as well as additional factual matters that I considered ought to be addressed. I have also had regard to the Commissioner’s comments (in his letter of 19 October 2023) regarding MAHPL’s account of the facts in opening.

27. I have addressed the more significant factual controversies in the course of my reasons on “tax benefit” and “dominant purpose”, and have addressed more minor factual controversies in the context of the narrative that follows.

28. The factual narrative below is arranged chronologically, within topics.

    MAHPL

29. As noted above, MAHPL is the head company of a tax consolidated group formed under Part 3-90 of the Income Tax Assessment Act 1997 (Cth). The other members of the group are MAPL, which became a member when the group was formed with effect from 17 September 2007, and Alphapharm, which became a member at the time it was acquired by MAPL on 2 October 2007.

    Mylan

30. At all material times, Mylan was a publicly held company incorporated under the laws of the Commonwealth of Pennsylvania, US, which was listed on the New York Stock Exchange or NASDAQ and a resident of the US for tax purposes. Through the Mylan group, it carried on a business which principally included the development, licensing, manufacturing, marketing and distribution of generic pharmaceutical products, as well as the supply of active pharmaceutical ingredients around the world.

31. Prior to 2006, the Mylan group’s operations and sales were primarily in the US domestic market. In 2006, it expanded its global operations by acquiring a controlling interest in Matrix Laboratories Limited (Matrix), a publicly traded Indian company which was one of the world’s leading suppliers of active pharmaceutical ingredients.

32. In the financial year ended 31 March 2007, the Mylan group’s principal markets were the US, India and Europe. It derived a total of USD 1,611,819 in revenues. In the same year, Mylan’s total debt was USD 1,776,362 and total shareholders’ equity was USD 1,648,860.

33. As at the close of market on Friday 28 September 2007, Mylan had a market capitalisation of approximately USD 3.97 billion.

    Merck, MGGBV and Alphapharm

34. At all material times, Merck was a global chemical and pharmaceutical company headquartered in Germany.

35. Prior to 2 October 2007, Merck Generics carried on the world’s third largest generics pharmaceutical business which, in 2006, generated revenues in excess of EUR 1.8 billion. Merck Generics had a number of indirectly held subsidiaries around the world, including in the US, France, Australia and Canada, which were its four largest markets, accounting for approximately 68% of Merck Generics’ sales and about 84% of profit, excluding R&D.

36. Alphapharm was Merck’s indirectly held subsidiary in Australia. Alphapharm’s immediate parent was MGGBV.

37. In 2007, Alphapharm was the leading generic pharmaceuticals company in Australia.

38. The structure of Merck Generics in early 2007 is depicted in the following diagram:

    Bid to acquire Merck Generics

39. On or about 6 March 2007, Mylan received a letter from Bear, Stearns & Co Inc on behalf of Merck. The letter stated that Merck was exploring the potential sale of its generics pharmaceuticals business (being Merck Generics). It also enclosed a Confidential Information Memorandum, and invited Mylan to provide a preliminary, non-binding indication of interest in acquiring Merck Generics (the Acquisition). The Acquisition was code-named “Project Genius”, with Merck given the code name “Mastermind”.

40. From about March 2007, for the purposes of preparing its indicative offer (and subsequently its bid) for the Acquisition, Mylan engaged, among others:

    (a)Merrill Lynch as its primary financial advisor;

    (b)Cravath Swaine & Moore LLP (Cravath) as its external counsel; and

    (c)Deloitte & Touche LLP (Deloitte) as its accounting and tax advisor.

41. On 12 March 2007, the Mylan Board of Directors (Mylan Board) met and resolved to submit a preliminary non-binding indication of interest for the Acquisition with a proposed purchase price of EUR 4.2 to 4.7 billion. Mylan submitted an indicative offer for the Acquisition on the same day. Mylan was subsequently invited to participate in a “second round” process for the Acquisition, with a final bid to be submitted by 30 April 2007.

42. In March, April and May 2007, Merrill Lynch provided Mylan with modelling, analysis and structuring alternatives for the Acquisition. The modelling included scenarios involving both wholly debt and partial debt/partial equity funding for the Acquisition. Mylan also received due diligence materials and analysis.

43. On 30 April 2007, the Mylan Board met and resolved (inter alia) to approve the submission of an updated non-binding proposal for the Acquisition, attaching revised drafts of a “Share Purchase Agreement”, “Transitional Services Agreement” and “Brand License Agreement”, as well as a copy of a “commitment letter” for the financing of the Acquisition received by Mylan from a syndicate of lenders (Merrill Lynch, Citibank and Goldman Sachs) (referred to in more detail below). Mylan submitted its updated proposal on the same day, proposing a base purchase price in the range of EUR 4.4 to 4.75 billion.

44. The marked-up draft Share Purchase Agreement and Transitional Services Agreement attached to Mylan’s updated proposal included the following notation:

    Note to Sellers: Purchaser’s acquisition structure to be further discussed with Sellers. We understand based upon our discussions during due diligence process that Mastermind [Merck] is willing to discuss and accommodate an optimal acquisition structure for Purchaser.

45. The marked-up draft Brand Licence Agreement attached to the proposal similarly included the notation: “Note to Sellers: “Purchaser’s acquisition structure to be further discussed with Sellers”.

    Share Purchase Agreement

46. On or about 3 May 2007, Mylan was invited to participate in the final stage of the Merck Generics sale process.

47. On 6 May 2007, Christian Brause from Cravath sent an email to representatives from Mylan with the subject “Genius/Structuring”. It stated, inter alia:

    As you know, the negotiations on Monday and Tuesday will move very fast. Thus, we will have no time to come up with a fully agreed upon acquisition structure. We therefore intend to built [sic] into the SPA some flexibility to rearrange the acquisition structure between signing and closing. We intend to do that by incorporating a new section that would essentially look like the one set forth at the end of this email

1. The end of the email set out a new proposed clause which ultimately became the basis for clause 3.1.5 of the Share Purchase Agreement. It stated:

   Structure of Transaction. At the election of Purchaser’s Guarantor, (i) any one or more Affiliates of Purchaser’s Guarantor may be substituted for Purchaser in the transaction and (ii) Purchaser or any such substituted purchaser may directly acquire the Interests in any Subsidiary … In any such event, the parties will cooperate in good faith to effectuate any such substitution any/or change in the acquisition structure

2. On 8 May 2007, the Mylan Board met and resolved that it approved the submission of the updated, non-binding proposal for the acquisition of Merck Generics for EUR 4.9 billion.

3. On 12 May 2007, the Mylan Board again met and resolved (inter alia) that it approved the execution and delivery of the Share Purchase Agreement and all of the transactions contemplated thereby. The Mylan Board also approved and authorised the financing described in the lenders’ Commitment Letter accompanying the Share Purchase Agreement (referred to in more detail below).

4. Also on 12 May 2007, Mylan, Merck Generics Holding GmbH, Merck S.A., Merck Internationale Beteiligung GmbH and Merck KgaA executed the Share Purchase Agreement (SPA), which provided for the Acquisition by Mylan of all of the shares in Merck dura GmbH, MGGBV, EMD Inc, Merck Generics Belgium B.V.B.A and Merck Genericos S.L. for a cash purchase price of EUR 4.9 billion (subject to certain adjustments) (being approximately USD 6.7 billion).

5. Mylan issued a press release on 12 May 2007 which stated (inter alia, emphasis added):

   Mylan Laboratories Inc. (NYSE: MYL) and Merck KGaA today announced the signing of a definitive agreement under which Mylan will acquire Merck’s generics business (‘Merck Generics’) for EUR 4.9 billion ($6.7 billion) in an all-cash transaction. The combination of Mylan and Merck Generics will create a vertically and horizontally integrated generics and specialty pharmaceuticals leader with a diversified revenue base and a global footprint. On a pro forma basis, for calendar 2006, the combined company would have had revenues of approximately $4.2 billion, EBITDA of approximately $1.0 billion and approximately 10,000 employees, immediately making it among the top tier of global generic companies, with a significant presence in all of the top five global generics markets.

   …

   Under terms of the transaction, which have been unanimously approved by Mylan’s Board of Directors, Mylan will acquire 100% of the shares of the various businesses comprising Merck Generics for a cash consideration of EUR 4.9 billion ($6.7 billion). Mylan has secured fully committed debt financing from Merrill Lynch, Citigroup and Goldman Sachs.

   The transaction is anticipated to be dilutive to full-year cash EPS in year one, breakeven in year two, and significantly accretive thereafter based on management’s internal projections. The company is committed to reducing its leverage in the near term through the issuance of $1.5 billion to $2.0 billion of equity and equity-linked securities. The combined company will generate substantial free cash flow that will further enable it to rapidly reduce acquisition-related debt. Reflecting its more leveraged capital structure and focus on growth, Mylan is suspending the dividend on its common stock.

6. While it was bound to proceed with the Acquisition pursuant to the SPA as signed, at the time that the SPA was executed, Mylan had not settled upon its preferred structure for the acquisition of the Merck Generics business. The terms of the SPA included provisions which allowed Mylan to put forward a finalised transaction structure, with provision also being made for indemnification of the Merck Generics side for any increase in its tax costs arising from such changes.

7. Clause 3.1.5 of the SPA provided as follows:

   Structure of Transaction. At the election of Purchaser [Mylan], (i) any one or more Affiliates of Purchasers may be substituted for Purchaser in the transaction and (ii) Purchaser or any such substituted purchaser or purchasers may directly acquire Interests in any Subsidiary … The parties will cooperate in good faith to effectuate any such substitution and/or change in the acquisition structure, including executing any necessary or advisable amendments to this Agreement in order to reflect the foregoing. Purchaser will agree to an appropriate full indemnification arrangement with Sellers and Sellers’ Affiliates to the extent such change in acquisition structure increases the tax costs to Sellers and Sellers’ Affiliates above the amount of costs that would have been incurred in connection with the sales and transfers set forth in this Section 3.1 as of the Signing Date.

8. Clause 21.5 (headed “Assignment and Designation of Transferors”) relevantly provided that Mylan:

   may designate any of its direct or indirect, wholly owned subsidiaries as a transferee of the Shares and Purchaser may assign its rights under this Agreement by way of security in connection with the Financing.

9. Notwithstanding the terms of the SPA that provided for changes to the stated acquisition structure, the Commissioner sought to emphasise that the original SPA was an agreement which Mylan was obliged to perform. The Commissioner contended that the fact Mylan entered into the original SPA prevented MAHPL from arguing that it would not have acquired Alphapharm in a way analogous to that which was provided for under the agreement. While I perceive the Commissioner’s point to be one concerning the implications of this matter for the primary counterfactual (as distinct from a factual contest), to the extent he disputed the fact, I find that Mylan had not settled on a final acquisition structure when it signed the SPA. This matter is further addressed in relation to the primary counterfactual below.

   Acquisition structuring

10. During May and June 2007, Mylan’s advisors presented it with various potential structures for the acquisition of Merck Generics. They contemplated (inter alia) that:

    (a)various US and non-US entities would be created, including indirect Australian, French, and Canadian subsidiaries of Mylan – MAPL, Mylan France SAS (Mylan France) and Mylan Canada NSULC (Mylan Canada), respectively; and

    (b)MAPL, Mylan France and Mylan Canada would acquire the shares in local MGGBV subsidiaries, financed by a mixture of equity (common stock) and debt.

11. One of the slide decks prepared by Mylan’s advisors was a Deloitte slide deck dated 27 April 2007 titled “Project Genius – Tax Overview”. That report assumed a total acquisition price of USD 7 billion, of which USD 1 billion was to be allocated to the Australian component of the Merck Generics business. In relation to the entities to be acquired in Australia, Canada and Japan, Deloitte’s report contemplated that:

    (a)the Australian entity would borrow from a “US/UK third party financial institution” the AUD equivalent of USD 750 million and otherwise be capitalised by USD 250 million equity, reflecting a debt capitalisation proportion of 75%;

    (b)the Canadian entity would borrow from a “Canadian branch of a US/UK third party financial institution” the CAD equivalent of USD 437.5 million and otherwise be capitalised by USD 62.5 million equity, reflecting a debt capitalisation proportion of 87.5%; and

    (c)the Japanese entity would borrow from a “Japanese branch of a US/UK third party financial institution” the JPY equivalent of USD 437.5 million and otherwise be capitalised by USD 62.5 million equity, also reflecting a debt capitalisation proportion of 87.5%.

12. On the same day (27 April 2007) there was also an email from Mr Todd Izzo (Deloitte) to Mr Jeffrey Mensch (Deloitte). In that email, Mr Izzo stated that he “would like to limit the foreign loans to Japan, Australia and Canada if possible”, to which Mr Mensch responded, “Australia is 3:1 safe harbour”, and quoted the following extract from “IBFD” (which is apparently a service provider in relation to cross-border tax affairs):

    From 1 July 2001, new thin capitalization measures (the “safe harbour” test) contained in Div. 820 of the ITAA97 apply a debt-to-equity ratio of 3:1 to all debt of an entity and not just related foreign party debt. For financial entities the debt-to-equity ratio is 20:1. Nevertheless, if the safe harbour test is failed, debt deductions will not be denied if the entity is able to demonstrate that the debt amount is at arm’s length (i.e. an independent party would be able to raise the same amount of debt under the same terms and conditions). Further, Australian entities with overseas investments may avoid the application of the thin capitalization provisions by satisfying the worldwide gearing test, which requires that the average value of their Australian assets be at least 90% of their worldwide assets.

13. Mr Izzo responded “fine” and also said as follows:

    Also, let’s not do a debt push down to Ge [apparently Germany]. Too much hassle. So, in sum, one bank, loaning to Japan and Canada through branches and directly to Austr[a]lia and Lux.

14. As further addressed below, MAHPL did not dispute that the thin capitalisation rules in each relevant jurisdiction influenced the amounts of debt being contemplated for acquisitions in a number of jurisdictions, but disputed that adopting structures that stayed within thin capitalisation limits could be characterised as tending to suggest a desire to maximise tax deductions.

15. On 1 May 2007, Deloitte issued a slide deck to Mylan entitled “Project Genius – Tax Overview”, which was labelled as “Draft: For Discussion Purposes Only (Subject to Review by Non-U.S. Tax Professionals)”. The slide deck contemplated (inter alia) that:

    (a)Mylan and a newly established Luxembourg S.a.r.l. would borrow funds from third party lenders;

    (b)various US and non-US entities would be created, including MAPL, Mylan France and Mylan Canada;

    (c)MAPL would acquire the shares in Merck’s Australian subsidiary, Alphapharm, from MGGBV, financed as follows:

    (i)a US subsidiary of Mylan “contributing the Australian dollar equivalent of US$250,000,000 in exchange for common stock” in MAPL; and

    (ii)MAPL borrowing “the Australian dollar equivalent of US$750,000,000 from a US/UK third party financial institution … secured by a guarantee from Mylan US and all Mylan’s non-US assets”; and

    (d)each of Mylan France and Mylan Canada would also acquire the shares in a local Merck subsidiary, financed with a mixture of equity (common stock) and external debt.

16. MAHPL relied on the fact that the subsequent slide decks prepared by Deloitte dated 11 May 2007, 30 May 2007 and 4 June 2007 also contemplated the formation of MAPL, Mylan France and Mylan Canada, each of which was to acquire the shares in a local Merck subsidiary using a mixture of equity and debt. MAHPL relied on the debt component of MAPL’s financing having been expressed in each slide deck as:

    the Australian dollar equivalent of US$750,000,000 … from a US/UK third party financial institution … secured by a guarantee from Mylan US and all Mylan’s non-US assets.

17. The Commissioner sought to focus the Court’s attention to other aspects of these slide decks, which he contended demonstrate Mylan’s tax structuring objectives. In respect of the 11 May 2007 presentation, the Commissioner observed that the presentation continued to contemplate that the Australian acquisition entity would obtain external debt funding, while the source of funding for the Canadian and Japanese acquisition entities had been varied to include internal borrowing.

18. The Commissioner pointed to the following statements in the 30 May 2007 revised slide deck as illustrating the influence of thin capitalisation rules in Australia, France and Canada on the planned capitalisation of each of the Australian, French and Canadian entities:

    The debt:equity ratio of Mylan France is 1.5:1, which is in line with the new French thin capitalization rules.

    …

    Related party debt push-down may have adverse Australian tax consequences; therefore, Genius Pty. Ltd. should be acquired before Lux Holdco’s acquisition of Genius BV.

    …

    Interest Deductions – Australia’s thin capitalization rules are based on accounting book values rather than issued capital (total debt cannot exceed 75% of the Australian asset values).

    …

    Since Mylan Canada is funded with intercompany debt, the Canadian thin capitalization rules come into play, which limits the debt:equity ratio to 2:1. Therefore, assuming a $500m total price for Genius Canada, the debt:equity ratio should be $333m of debt at $167m of equity. 

19. In relation to the 4 June 2007 Deloitte slide deck, the Commissioner drew attention to the “Alternative A” structure, which assumed third party lenders loaning funds into each of Mylan Australia, Mylan Japan and Mylan Canada, and the relationship between the gearing ratios derived in relation to the posited quantum borrowed, and the thin capitalisation limits in those jurisdictions. 

20. On 12 June 2007, Deloitte circulated a further slide deck dated 11 June 2007 entitled “Project Genius – ‘Simple’ Alternative” (marked as a draft for discussion purposes). MAHPL contended that this slide deck contemplated a structure under which (inter alia) MAPL would acquire the shares in Alphapharm using USD 250 million in equity and USD 750 million in debt in the form of a note from “Lux Holdco” (Mylan Luxembourg Sarl), rather than external financing from a third party lender. The Commissioner disputed this description and drew attention to step 18. The Commissioner stated that that step showed that, under the structure being contemplated, only the Australian Merck entity was to be acquired separately (and for cash consideration) whereas the Canadian and Japanese Merck (and other) entities were to be acquired indirectly. Step 18 of the slide deck stated:

    Mylan Australia acquires 100% of the outstanding shares of Genius Pty. Ltd. from Genius Genericos Group BV (“Genius BV”) in exchange for the Australian dollar equivalent of US $1,000,000,000 in cash.

21. On 10 July 2007, Mr Joseph Vitullo (PwC US) sent an email to Mr Tony Carroll (PwC Australia) regarding PwC US having been engaged by Mylan. Mr Vitullo sought Mr Carroll’s assistance in relation to a “debt pushdown into Australia related to the acquisition of the Merck generics business”. That email included the following:

    Steve White (ITS partner) and I (ITS director) have been engaged by Mylan to assist them in the structuring of a debt pushdown into Australia related to the acquisition of the Merck generics business. We would like to have a conversation with you this week to discuss alternative means by which we can accomplish this goal. 

22. On 13 July 2007, Mr David Kennedy (Vice President of Corporate Taxation, Mylan) signed a “Statement of Work” (SOW) between Mylan and its subsidiaries and PwC. The purpose of the SOW was stated as follows:

    This SOW covers services in connection with the acquisition and integration of Merck’s Generics Business (“MGB”). Examples of the types of services covered by this SOW include evaluation of the tax implications and possible tax planning strategies at the federal, state and international level, associated with the acquisition and integration of MGB.

23. The SOW also described the nature of the services to be provided by PwC, which were grouped in three categories – namely, “Analyze”, “Develop” and “Implement”. The description of the services to be provided did not refer to the repatriation of foreign income or Mylan’s stated de-leveraging plans (the absence of which was a matter to which the Commissioner called attention).

24. Following Mylan’s engagement of PwC to provide tax advice in relation to the Acquisition, PwC’s personnel undertook a range of activities, recorded in email correspondence and other documents, in furtherance of its retainer.

25. On 14 July 2007, Mr Vitullo sent an email to various PwC personnel attaching “a projection by country of Merck’s operating profits from 2007 through 2010”. The email stated that “[t]his should help in assessing each country’s interest capacity”. The attachment to that email included hand-written notations that highlighted Alphapharm, among other entities. As is discussed below, MAHPL and the Commissioner put diametrically opposed constructions on this document. The Commissioner said it showed an analysis directed at working out how much interest had to be charged to eliminate taxable income, whereas MAHPL contended it showed that there was (contrary to the Commissioner’s submission) analysis of MAPL’s capacity to service debt.

26. On or around 18 July 2007, Mylan prepared a document titled “Weekly Update – Finance: 6 – Tax Plan & Compliance – Week of 071607”. In a section with the heading “Issues/Risks/Key Decisions”, that document included the following:

    •Conclude which alternative acquisition structure is optimal from a tax perspective

    •Assess taxable income capacity, on a country-by-country basis, to absorb acquisition finance interest expense

    •Assess optimal levels of local country debt giving consideration to income capacity, debt:equity restrictions, income tax rate arbitrage, and fair values

27. On 19 July 2007, Mr Carroll sent an email to Mr Vitullo attaching a slide deck prepared by PwC entitled “Mylan Laboratories Structure Alternatives” (marked as “Draft Report”). In the email, Mr Carroll stated that:

    I have suggested limiting the borrowing level to the same proportion of the total borrowing to the total purchase price. We could always stretch this further within the safe harbour rules in Australia but we need to be comfortable from an anti avoidance perspective that we can justify a greater amount form a commercial perspective.

28. The slide deck set out five alternative structures for the acquisition of Alphapharm in Australia. Structure 1 contemplated external borrowing by an Australian subsidiary of Mylan to fund the Acquisition. Structure 1 included a note that:

    It is recommended that the level of borrowing be limited to the worldwide debt funding proportion for this acquisition. Where there is any increase above this level, the Australian anti-avoidance provisions would need to be considered.

29. Structures 2, 4 and 5 contemplated “internal” debt funding into Australia. Structure 3 contemplated an external borrowing by a partnership that would be treated as part of the Australian tax consolidated group.

30. Also on 19 July 2007, Mr Vitullo responded to Mr Carroll’s email stating that:

    we have agreed with Mylan that on 8/3 we will deliver a comprehensive holding company structure along with proposed debt pushdown structure for Australia, France, Canada, and Japan. We will incorporate each separate country’s debt pushdown strategy into this presentation.

31. Also on 19 July 2007, Mr Carroll sent an email to Mr Vitullo stating:

    As you will see from my note I did not want to push the debt to the limit unless we have strong commercial reasons for doing so.

32. Also on 19 July 2007, Mr Steve White (PwC US) sent an email to Mr Carroll stating that:

    Mylan has asked if we would give them the names of law firms that we have worked with on similar debt pushdowns/financings in that they would hope that this would help expedite the implementation of any strategy that we develop.

33. On 1 August 2007, Mr Vitullo sent an email to his PwC colleagues, attaching a PowerPoint file titled “Merck Acq Structures”. In his email, Mr Vitullo commented on the Canada, Australia and France acquisitions (among other things) (emphasis in original):

    October 1 Structure – This represents the proposed minimum structure required to be in place at the date of the closing of the Merck transaction. The following are specific country questions with respect to this structure.

    Canada

    Would it be possible to simply put in place a loan/equity from Bermuda 1 to a newly formed ULC which would be used to acquire the Canadian target entity? We would then after Oct 1 drop the note down into the structure and form the Canadian holding partnership structure which ultimately generates the tax savings element of the structure.

    Australia

    Would it be possible to simply put in place a required loan/equity from the 80/20 company to Aus Holdco to acquire the target entity? We would then after Oct 1 drop the note down into the structure and form the Australian high/low tax structure which ultimately generates the tax savings element of the structure.

    …

    1)France – we contemplate establishing internal debt levels of 1.5:1. Are we correct that as long as Mylan maintains this relationship, there should not be a thin-cap exposure?

    2)All Countries – Please indicate if there is any principal repayment requirements for the internal debt that we are putting into place. In other words, is a demand loan that Mylan keeps in place for a significant period of time acceptable, is there a requirement that principal payments are made over the life of the loan or at a point in time.

1. On 2 August 2007, Mr Garth Drinkwater (PwC Australia) sent an email (“on behalf of Tony Carroll”) to Mr Vitullo which, among other things, stated that:

   Interest payments by Aust Hold should be deductible for Australian income tax purposes (subject to thin capitalisation provisions – broadly 75% of Australian assets less non-debt liabilities).

   …

   There are no requirements for principle [sic] payments to be made over the life of the loan (i.e. principle [sic] can be repaid at the end of the loan term). However, interest would need to capitalised (if not paid). Interest withholding tax would continue to be payable as the interest accrues.

   …

   We note that if interest is capitalised to the loan balance, rather than being paid, it may put pressure on the Australian group’s thin capitalisation position where there is no corresponding increase in the book value of the assets (e.g. via increases in retained profits or asset revaluations).

2. On 3 August 2007, PwC prepared a slide deck titled “Merck Tax Integration August 2007”. Under the heading “Tax Integration Goals/Objectives”. MAHPL accepted on the transcript that this document was received by Mylan even though the covering email was not in evidence. The slides included the following statements:

   (1)Allow for redeployment of foreign excess cash via tax efficient Treasury Centre

   (2)Foreign tax reduction

   A.Use of debt-pushdown to effect immediate ETR reduction

   B.Consider utilizing a tax-efficient Principal in developing the new centralized supply chain management structure.

   …

   (2)      Foreign tax reduction

   A.        Use of debt-pushdown to effect immediate ETR reduction

   -Tax efficient internal debt utilized in Australia, France, Canada and Japan. Approximately $40M-$50M of annual tax savings over the first five years (resulting in immediate ETR benefits) may be realized by Mylan

3. On 10 August 2007, Mr Drinkwater sent an email to Mr Vitullo with the subject “Mylan acquisition – Stamp duty comments”. That email provided comments in relation to a “Direct Acquisition”, “Indirect Acquisition” and an “Alternative” structure.

4. Regarding the “Direct Acquisition”, Mr Drinkwater stated that a liability would arise for “New South Wales share transfer duty at 0.6% on the greater of market value or consideration paid”.

5. Regarding the “Indirect Acquisition”, being an “indirect acquisition of Alphapharm by acquiring a foreign holding company further up the chain”, Mr Drinkwater stated that no liability for share transfer duty would arise “provided the foreign company does not have a share register in Australia or a registered office in South Australia”. Mr Drinkwater also stated that “[i]f an indirect acquisition occurs, it would not be possible to push debt into Australia until Alphapharm is later moved under the Australian holding company”.

6. Mr Drinkwater commented on the “Alternative” structure as follows:

   Merck Generics Group BV could incorporate a new Australian holding company in Victoria (“Newco”) and transfer Alphapharm under the Newco prior to Mylan’s acquisition of the three global Merck companies. This transfer should be eligibile [sic] for the New South Wales corporate reconstruction exemption (subject to land rich issues etc as noted above). In addition, the debt pushdown would be effective on acquisition by Mylan (and therefore we would not need to wait one year before the debt pushdown could be effected).

   Newco and Alphapharm could be transferred and incorporated into your preferred structure one year later.

   Of course, this requires the co-operation of Merck and for Merck Generics Group BV to apply for the corporate reconstruction exemption. That said, this is not an unusual transaction here in Australia.

7. On 23 August 2007, Mr Drinkwater sent an email to Mr Vitullo. Among other things, that email confirmed that “we should be able to get a step up in the accounting values of the Australian Group” and then commented that “this was important for Australia’s thin capitalisation rules”.

8. On 1 September 2007, Mr Vitullo sent an email to Messrs Carroll and Drinkwater with the subject “Time of Transactions”. That email included the following (underlining in original):

   We have been reviewing all of the Oct 1 steps and researching some of the US tax issues associated with the transactions which achieve the purchase of Merck targets in France and Australia prior to the acquisition of Merck BV. Some of the US tax, legal, and govenmental [sic] approval issues are particularly troublesome and we are now wondering if we may want to reconsider the timing of the debt pushdowns into France and Australia.

   Accordingly, we would like you to provide us, in a return email, confirmation of our understanding that it would be possible to push debt into your respective countries after Mylan acquires Merck BV. We anticipate that the internal debt pushdowns would occur within days or weeks of Oct. 1.

9. On 4 September 2007, Mr Carroll sent an email to Mr Vitullo with the subject “Acquisition structures”. That email included the following:

   Further to our discussions this morning, I confirm that if the purchaser of Alphapharm is a wholly owned subsidiary of New Australian Hold Co, there are no adverse consequences from an Australian perspective. Your need for this from a US perspective also assists me in any arguments I might have regarding why we set up a two tiered structure and formed a tax consolidated group, prior to acquiring the Alphapharm company, from an Australian thin capitalisation perspective, so I welcome that addition.

   In relation to the alternative acquisitions [sic] structures, I would confirm that my preferred option, would be to establish New Australian Hold Co and its wholly owned subsidiary, underneath the proposed Bermuda structure and debt fund either, Australian Hold Co or Australian Interposed Co, to fund the acquisition. Under this arrangement an agreement would be entered into with BV prior to your acquisition of BV but conditional on Mylan’s acquisition of BV.

   In my view from an income tax perspective, I believe there are considerably stronger arguments in relation to the debt push down, under this alternative than the one set out below.

   The alternate structure would involve the establishment of Australian Hold Co and Australian Interposed Co by BV and then an acquisition from BV after Mylan has acquired BV. In my view this proposal substantially increases the risk that interest deductions may be denied under the debt push down arrangements.

   The stamp duty corporate reconstruction exemptions is on the basis of an internal reorganisation and whilst the technicalities of the relief are available it is not really intended that there would be a change in ownership of BV and bearing in mind that the NSW government, to whom this duty would be payable, is as I understand it, one of Alphapharm’s largest customers, I am not sure you necessarily want to push the letter of the law to this extent, bearing in mind the commercial relationships between Alphapharm and the NSW government from whom you are obtaining the concession. Further from an income tax perspective, the debt pushdown is on the basis this is a third party acquisition. There is a clear conflict between the reasons for obtaining the stamp duty relief and the reasons for undertaking the debt push down transaction. The Australian Revenue are very wary of internal reorganisations that achieve a debt push down.

   As originally discussed in one of our earlier conference calls, I believe the avoidance of the AU$6 million in stamp duty whilst potentially available, does increase the risks both from a tax perspective, in respect of the debt pushdown and secondly has a potential commercial outcome which could be adverse. I would strongly advise adopting the original proposal and pay the stamp duty.

   As mentioned from a thin capitalisation perspective, the establishment of a two company structure in Australia is our preferred route in any event.

10. On 10 September 2007, Mr Drinkwater responded to an email from Mr Vitullo concerning the timing of the transfer of legal title of Alphapharm. Mr Drinkwater’s email stated as follows:

    Following on from your email below, I understand that the legal transfer of Alphapharm will be effected minutes before the legal transfer of Merck Generics Group BV (despite issues around the timing of cash transfers). This should not give rise to an Australian income tax problem and the debt pushdown should still be effective in Australia.

11. Also on 10 September 2007, Mr Drinkwater sent an email to Mr Vitullo which included comments regarding “timing of steps”, “foreign exchange gains/losses” and “incorporation of companies”. Among other things, that email noted that it would be necessary to undertake “a thin capitalisation calculation to ensure that the transfer of Note A1 to the Australia 1 would provide sufficient equity value from a thin capitalisation perspective”. This document was objected to when the Commissioner sought to tender it. The Commissioner did not press the tender at that time. However, the Commissioner’s annexure detailing facts annexed to his closing submissions did refer to this document and the document was not struck through in the marked up index to the court book, prepared by the parties. Accordingly, I have treated it as in evidence, notwithstanding the initial objection and withdrawal of the initial tender.

12. On 11 September 2007, Mr Drinkwater responded to an email from Mr Vitullo, by which Mr Vitullo sought comments on “copies of the draft intercompany notes to effectuate the transfers”. Mr Drinkwater’s email included comments regarding “transfer pricing”, “thin capitalisation” and “legal review”. Among other things, that email included the following:

    I have spoken to my transfer pricing colleagues regarding the terms of the Al and A2 PNotes. An interest rate 400 basis points above the 1 month AUD LIBOR rate may be on the high side of what is acceptable to the Australian Taxation Office.

    …

    we would recommend that a benchmarking exercise be carried out for the A2 and Lux8 PNotes to determine an appropriate interest rate. A benchmarking exercise would take approx 4 weeks to determine an appropriate rate and another approx 4 weeks to pull the documentation together as supporting evidence for the interest rate. As part of this exercise we could incorporate terms that would justify a higher interest rate (e.g. duration of the loan, fixed rate, early repayment at discretion of the borrower and subordinating the loan to any external borrowing).

    …

    I understand that the thin capitalisation position of the Australian Group (including Alphapharm) will be determined post-acquisition. On this basis, we will need flexibility as to the amount of the A2 or Lux8 PNotes coming into Australia. As such, we recommend that the A2 and Lux8 PNotes contain a clause which enables them to be partly paid down if required.

13. On 12 September 2007, there was a meeting of the Mylan Board. The minutes of that Board meeting record that: “the primary purpose of the meeting was to update the Board with regard to the upcoming closing of the Merck Generics acquisition and related matters”; there was discussion of “the status of the financing”; and certain Merrill Lynch personnel “gave an overview of the debt capital markets including the impact of supply and demand imbalances with respect to newly issued debt”. The Commissioner observed that the minutes indicate that no representative of PwC was present at the meeting and emphasised the absence of any record of consideration of the proposed debt push-down structure and its relationship with the debt-servicing capacity of Mylan’s subsidiaries, or the Merck Generics entities that were to be acquired.

14. On 13 September 2007, PwC Australia sent a note to PwC US titled “Mylan – Australian acquisition of Alphapharm – List of tax issues considered”. That note addressed a number of issues under the headings “US considerations”, “Australian income tax” and “Australian stamp duty”. Among other things, under the bullet point which reads “Deductibility of interest”, PwC Australia referred to “[t]hin capitalisation”, “[t]iming of recapitalisation of the Australian group” and “[t]iming of acquisition of Alphapharm compared to acquisition of Merck Generics Group BV”.

15. On 20 September 2007, Mr Drinkwater sent an email to Mr Vitullo which included the following comments with respect to the topic of the “timing of legal transfer”:

    It would be preferable from an Australian perspective for a sale and purchase agreement to be drafted in relation to the transfer of Alphapharm and signed before the sale and purchase agreement to transfer Merck Generics Group BV is signed. The actual transfer of Alphapharm would be conditional on the transfer of Merck Generics Group BV.

    If the agreement is structured this way the debt pushdown would be effective in Australia. If it is not possible for the agreements to be drafted in this way, we expect that the debt pushdown would still be effective (given that it would occur contemporaneously with the acquisition of Merck Generics Group BV) but at a marginally higher risk of being challenged by the Australian Taxation Office.

16. Also on 20 September 2007, Mr Drinkwater sent an email to Mr Vitullo stating that he had received confirmation that the transfer agreement for Alphapharm would be signed before the transfer agreement for MGGBV. Mr Drinkwater then stated:

    Further, the transfer will be effected before the transfer of Merck Generics Group BV will be effected. As such, the debt pushdown would be effective in Australia.

17. Also on 20 September 2007, Mr Drinkwater responded to an email from Mr Vitullo by which Mr Vitullo requested comments on “revised drafts of the notes”. Mr Drinkwater stated as follows:

    The terms of the Promissory Notes seem fine, although l would add one clause to PNote A2 to allow it to be partially repaid if needed (any partial repayment would need to be funded by an equity injection). This is to provide flexibility from a thin capitalisation perspective. Whilst broadly the thin capitalisation rules work on a ratio of 75% debt to Australian assets, there are adjustments which could impact this. We would not be in a position to accurately forecast the actual allowable debt level until the valuation is complete.

18. On 26 September 2007, there was a further meeting of the Mylan Board. The minutes of the Board meeting indicate that Merrill Lynch representatives and Cravath representatives were present, and PwC representatives were not present. The Commissioner noted that, while management addressed the board on a number of matters concerning the Acquisition, there is no record that the Board was addressed on the debt push-down structure. I do not regard that as a matter of real significance; there is no reason why the Board would, or ought, not have left the detail such as internal financial structuring to management, without requiring a presentation on the topic.

19. On 28 September 2007, Mr Vitullo sent an email to (among others) Messrs Carroll and Drinkwater (both of PwC) with the subject “Final Version of Oct 1 & and latest ver of Post-Acq Slide Decks”. In that email (which was an internal, PwC communication), Mr Vitullo said that “[t]he client has asked that we keep the momentum going with regard to the implementation of the post-closing steps as it is critical for Mylan to attaining the intended tax benefits”. The email does not make reference to Mylan. Indicating that implementation of the post-closing steps was critical to attaining any non-tax benefits.

20. The Commissioner relied on the above emails in support of his contention that the debt push-down structure was developed by PwC independent of any non-tax (eg, corporate finance or debt capital markets) discipline.

    Execution of the Amended SPA

21. On 1 October 2007, the SPA was amended (Amended SPA). The amendments provided for (inter alia):

    (a)the designation of Genius GmbH, Alphapharm and Merck Generics France Holding SAS as “Additional Target Companies”;

    (b)the designation of MGGBV as an “Additional Seller”;

    (c)the designation of Mylan Delaware Holding Inc, MAPL, Mylan Canada, Mylan France and Mylan Luxembourg 2 S.a.r.l. (Lux 2) as “Additional Purchasers”; and

    (d)a Closing Date for the transactions of 2 October 2007 (Frankfurt time).

22. Section 4 of the Amended SPA provided for the sale and transfer of Additional Target Companies prior to the Closing Date. These actions included the sale of Alphapharm, Mylan Canada and Mylan France in exchange for promissory notes.

23. Amendments made to the SPA are addressed further below.

    Acquisition financing – debt

24. Beginning in about April 2007, Mylan’s advisors exchanged with counsel for a syndicate of external lenders drafts of a “Commitment Letter” (including Term Sheets) under which the lenders agreed to provide finance for Mylan’s acquisition of Merck Generics, and refinancing of its existing indebtedness, through a series of Senior Credit Facilities and an Interim Loan.

25. A draft Term Sheet for the Senior Credit Facilities labelled “CS&M Draft—4/24/07” contemplated “[s]enior secured credit facilities… in an aggregate principal amount of up to $4,250.0 million” and contained the following definition of “Borrower” (emphasis in original):

    With respect to the US First Lien Term Loan Facility and the First Lien Revolving Facility, Mylan Laboratories Inc. (“US Borrower”). With respect to the Euro First Lien Term Loan, [ ] (the “Euro Borrower” and, together with the US Borrower, the “Borrowers”). [To be discussed: additional foreign borrowers]

26. A subsequent draft of the Term Sheet for the Senior Credit Facilities dated 26 April 2007 retained the notation in bold, above.

27. In a draft Term Sheet for the Senior Credit Facilities labelled “CS&M 4/27/07”, the definition of “Borrower” was as follows (emphasis in original):

    With respect to the US Term Loan Facility and the Revolving Facility, Mylan Laboratories Inc. (“US Borrower”). With respect to the Euro Term Loan, [ ] a European subsidiary of the US Borrower to be mutually agreed (the “Euro Borrower” and, together with the US Borrower, the “Borrowers”). [To be discussed: If requested by the US Borrower, one or more additional foreign borrowers may be added on terms and conditions to be agreed between the US Borrower and the Lead Arrangers.]

28. On 30 April 2007, the lenders issued a final Credit Facilities Commitment Letter to Mylan. The Term Sheet for the Senior Credit Facilities contemplated “[s]enior secured credit facilities … in an aggregate principal amount of up to $4,850.0 million” and defined “Borrower” as follows (emphasis in original):

    With respect to the US Term Loan Facility and the Revolving Facility, Mylan Laboratories Inc. (“US Borrower”). With respect to the Euro Term Loan, a European subsidiary of the US Borrower to be mutually agreed (the “Euro Borrower” and, together with the US Borrower, the “Borrowers”). If requested by the US Borrower, one or more additional borrowers (including non-U.S. borrowers) may be added on terms and conditions to be mutually agreed between the US Borrower and the Lead Arrangers.

29. On 11 May 2007 and 18 June 2007, the lenders issued a further Credit Facilities Commitment Letter and an Amended and Restated Credit Facilities Commitment Letter, respectively, to Mylan. In each case, the definition of “Borrower” in the Term Sheet for the Senior Credit Facilities remained the same. Under the Amended and Restated Credit Facilities Commitment Letter, the lenders committed to provide the following Senior Credit Facilities:

    (a)Euro Term Loan: EUR equivalent of USD 1.6 billion, maturing seven years after the closing date;

    (b)US Tranche A Term Loan: USD 500 million, maturing six years after the closing date;

    (c)US Tranche B Term Loan: USD 2 billion, maturing seven years after the closing date; and

    (d)Revolving Facility: USD 750 million, maturing six years after the closing date.

1. In his closing submissions, the Commissioner accepted that Mylan would have expected to have an OFL as a consequence of the Acquisition. In addition to addressing various of the s 177D(b) factors, the Commissioner’s argument on dominant purpose highlighted that Mylan’s OFL position meant that it could not reasonably expect to utilise any FTCs to reduce its US tax liability arising from repatriation or accrual of foreign source income, including credits for tax paid in Australia.

2. There was some discussion regarding whether the payment of US tax and foreign tax when an OFL situation precluded recourse to FTCs can be aptly described as “double taxation”, as Mr Glenn had done in his report. In his oral evidence, Mr Glenn described the tax in such circumstances as “certainly incremental taxation” that would not be expected were it not for US tax rules precluding access to foreign tax credits. Prof Rosenbloom referred to the foreign tax incurred (where there is no ability to reduce US tax by foreign tax credits) as going “directly to the bottom line”, and as a “direct out-of-pocket cost” which could not be credited.

3. As the Commissioner recognised, with Mylan in an OFL position, income generated in Australia would be taxed at 30% in Australia and, upon being repatriated to the US, would bear further tax at a rate between 35% to 40% (US corporate tax and state tax rates combined). The focus of the Commissioner’s argument was, then, that in all the scenarios illustrated by Mr Glenn’s table (which has been reproduced at paragraph 291 above), the US corporate tax on income remitted from Alphapharm to the US remains constant at 35% (USD 35 on each USD 100 of remitted income). The Commissioner sought to highlight that what changes in the various scenarios, and what drives the total tax burden and Mylan’s earnings after tax, is the amount of Australian tax paid. As MAPL’s interest expense increases:

   (a)the amount of Australian taxable income and, hence, Australian tax paid, reduces;

   (b)the overall combined US and foreign tax liability reduces in percentage terms; and

   (c)the after tax earnings of Mylan increase.

4. Although the withholding tax expense goes up the more interest MAPL pays, the combined income and withholding tax burden goes down. This is illustrated by the fact that, in Mr Glenn’s alternative two, the total Australian income tax and withholding tax is USD 20 whereas, when the amount of assumed debt (and therefore interest expense) is increased in alternative three, the total Australian income tax and withholding tax is USD 15.

5. Against that background, the Commissioner accepted that it was economically rational for Mylan to seek to reduce its overall tax burden (given the inability to claim FTCs) but submitted that “[t]he reduction of Australian tax [by incorporating MAPL and having it borrow funds] was a response to Mylan being in an OFL position, which created the motivation to reduce non-US tax on foreign source income repatriated to Mylan”. In effect, the Commissioner’s submission was that the purpose of entry into the schemes was to address the consequences of Mylan’s OFL position by reducing the amount of tax paid in Australia (the rationale being, the less tax paid, the less the impact of an inability to claim FTCs).

6. In my view, it is artificial to seek to characterise avoiding the impact of the OFL as avoiding Australian tax. As Mr Glenn’s evidence showed, (other things being equal) a taxpayer in Mylan’s position would be indifferent to the quantum of debt to equity of a subsidiary such as Alphapharm, provided it could obtain full FTCs for foreign tax paid.

7. The net taxes paid by Mylan after foreign tax credits have been applied is a function of whether or not Mylan could claim foreign tax credits. That is a function of the US revenue laws, not Australian tax laws. The Commissioner’s analysis on this issue seeks — artificially in my view — to focus only on the line of Mr Glenn’s table that sets out the US tax liability of Mylan before the application of foreign tax credits, and to treat differences in the “After Tax Earnings of Mylan” lines as driven only by the non-payment of Australian taxes. In my view, this ignores the fact that the net US tax position is a function of whether or not, as a matter of US revenue law, foreign tax credits can be claimed for the Australian taxes, which vary with each of Mr Glenn’s alternatives.

   Any other consequence for the relevant taxpayer or persons referred to in s 177D(b)(vi)

8. The Commissioner did not make any additional submissions on this point specifically. The only matter MAHPL raised was that there were expected to be significant commercial benefits accruing to MAPL and the group as a result of the transaction.

9. I accept that the acquisition of the Merck Generics group, including Alphapharm, was expected to be of benefit, commercially, to the Mylan group. But that expectation and aim arises at such a level of generality that it does not shed light on whether or not the schemes were entered into or carried out (in whole or in part) for the dominant purpose to which s 177D refers.

   (viii)     The nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi)

10. MAHPL is a wholly owned subsidiary of the Mylan group, as is MAPL, Lux 1 and Lux 2. The only submissions made by the Commissioner on this factor:

    (a)referred to his submission, made in connection with s 177D(b)(ii), that the scheme involved an internal reorganisation of no real economic substance; and

    (b)referred to and reinforced his submission that the absence of contemporaneous analysis of debt servicing capacity is significant in the context of the related party relationships.

11. I have addressed elsewhere the matter of the lack of contemporaneous analysis of MAPL’s capacity to service debt.

12. The Commissioner’s submissions on the second point included the contention that (emphasis added):

    the relationship between Mylan Inc. and MAPL enabled the parties to collude to produce an outcome whereby interest deductions could be claimed in Australia and the US, with no corresponding amount of interest income being included in Mylan Inc.’s US tax base.

13. This submission asserts a conclusion, not a reasoned basis for a conclusion.

14. Although MAHPL submitted that this factor was “at best, neutral”, the related party relationships between MAHPL and the other Mylan group companies involved in the scheme explains much. MAHPL has not shied away from that point, emphasising throughout that aspects of the Commissioner’s analysis and expert evidence of Mr Johnson proceeded from the perspective that arm’s length dealings were still to be expected, and departures from outcomes that might be expected between arm’s length parties were, ipso facto, colourable.

15. The related party relationships explain why the schemes involved MAPL being funded by intercompany promissory notes, as well as the flexible terms of PN A2 (which were utilised by capitalisation of interest and apparently ad hoc repayments of principal that were connected with the issue of further equity). The related party feature also explains why the focus was on group financing arrangements, without the kind of close attention to debt servicing capacity that might be expected where a standalone company enters into a loan with a third party lender. It also explains the final refinancing of the balance of PN A2 with another intercompany note, PN A4.

16. While the related party status of the protagonists looms large in explaining the shape of the schemes, it does not do so in a way that points to the requisite dominant purpose. As I have addressed above, what generated the deductions was MAPL having interest-bearing debt. The related party status of MAPL, Lux 1 and Mylan explains the way in which that debt was structured, but the tax deductions were driven by the quantum of, and interest rate on, MAPL’s debt. I am satisfied, based on the evidence referred to above, that the initial fixing of the interest rate at 10.15% occurred by no later than 23 February 2008 and that the rate was not driven by a desire to maximise deductions.

17. However, and as also set out above in addressing s 177D(b)(i), the failure to consider refinancing PN A2, or resetting the interest rate on PN A2, following marked declines in rates is explicable by reference to the related party status of the companies involved. That inaction does indicate an indifference to the cost to MAPL of interest on its finance which tends to support the existence of the requisite dominant purpose in relation to an aspect of how the scheme was carried out (cf the purpose to be attributed to entry into the scheme).

    Conclusions on dominant purpose

18. I do not consider that, having regard to the eight matters in s 177D(b), it would be concluded that Mylan or any other of the persons who entered into or caried out the schemes or any part of the schemes did so for the purpose of enabling MAHPL to obtain a tax benefit in connection with the schemes.

19. Of the numerous topics addressed above in relation to those eight matters, only one supports a contrary conclusion: the failure to refinance PN A2 or otherwise revisit the interest rate paid on PN A2. Nevertheless, the authorities recognise that not all matters need to point in one direction, whether the conclusion is that that there was the requisite dominant purpose, or the converse: see, eg, Sleight at [67] (Hill J). Other matters addressed are neutral, or point to purposes other than obtaining a tax benefit in connection with the schemes.

20. It must be recalled that merely obtaining a tax benefit does not satisfy s 177D: Guardian at [207] (Hespe J, Perry and Derrington JJ agreeing). Nor does selecting, from alternative transaction forms, one that has a lower tax cost of itself necessarily take the case within s 177D. It is, as the plurality explained in Spotless Services (at 416), only where the purpose of enabling the obtaining of a tax benefit is the “ruling, prevailing, or most influential purpose” that the requisite conclusion will be reached. In my assessment, MAHPL has established that, assessed objectively (and keeping in mind that the question is not what Mylan’s actual, subjective purpose was), the facts of this case do not attract that conclusion.

    CARRY FORWARD LOSSES 

21. The amended assessments issued by the Commissioner denied MAHPL carry forward losses that were the consequence of the interest costs of MAPL that MAHPL claimed as deductions in earlier years.

22. As I have concluded that Pt IVA does not apply to the interest deductions, it follows that the carry forward losses should not have been disallowed by the Commissioner. 

    SHORTFALL INTEREST CHARGE

23. MAHPL contended that the Commissioner erred in failing to remit all, or part, of the shortfall interest charge imposed for the income years in dispute pursuant to s 280-160 of Schedule 1 to the TAA. MAHPL submitted that decision was unreasonable on the Wednesdbury standard as the Commissioner failed to take into account the delay associated with his audit, and the complexity of the issues involved.

24. In view of my conclusions on the substantive Pt IVA issues, it is not necessary to determine whether the Commissioner erred in the exercise of his power to remit the shortfall interest charge, as MAHPL contended.

    REMITTER AND FURTHER DETERMINATIONS

25. On 21 April 2021, the Commissioner, by his delegate, made determinations under s 177F(1)(b) of the ITAA36 for the income years ended 31 December 2007 to 31 December 2017 cancelling MAHPL’s deductions for interest expenses on the debt under PN A2. Each of these determinations specified that a stated sum “being a tax benefit that is referable to a deduction being allowable to Mylan Australia Holding Pty Ltd” for the stated year of income “shall not be allowable to the taxpayer in relation to that year of income”.

26. Nothing was said in any determination regarding the conceptual basis upon which the Commissioner had determined a tax benefit capable of being disallowed by the exercise of the Commissioner’s powers under s 177F(1)(b). Nothing was required to be said about such matters (in particular, the “scheme” identified by the Commissioner, and the counterfactual that was applied in calculating the tax benefit for the determinations). Nevertheless, as it was common ground that the Commissioner’s secondary and tertiary counterfactuals were only developed after MAHPL put forward alternatives to the Commissioner’s primary counterfactual when the Commissioner was determining MAHPL’s objections to the amended assessments, it is clear enough that the Commissioner issued those determinations having devised the primary scheme and having calculated the tax benefit by reference to the primary counterfactual.

27. In his appeal statements, the Commissioner stated that, if the Court were to find that the secondary or tertiary counterfactual was the preferable counterfactual, the Court should remit the matter to the Commissioner to make further determinations under s 177F(1)(b) to disallow so much of the deductions for interest claimed by MAHPL as exceeds the amount of interest it would have or might reasonably have incurred under those counterfactuals.

28. In response to the Commissioner having raised the prospect of further determinations being issued, MAHPL contended in its opening submissions that the Court could not remit the matter to the Commissioner to make further determinations. In advancing this argument, MAHPL drew attention to the fact that, whereas the primary counterfactual proceeded on the basis that Alphapharm would have joined the Mylan group as a result of the acquisition of its former immediate parent, MGGBV (and MAPL would never had been incorporated), the secondary and tertiary counterfactuals and associated tax benefits rest on the premise that MAPL would have been incorporated and would have acquired Alphapharm. MAHPL observed that, during the objection process, the Commissioner could have, but did not, make new or alternative determinations, addressing the narrower scheme and calculating the tax benefits by reference to the secondary and tertiary counterfactuals, in reliance on s 169A(3).

29. Returning to the secondary and tertiary counterfactuals, MAHPL submitted as follows (footnotes omitted):

    It is also important to note that the Commissioner’s proposal that the Court remit the matter to him to make further determinations under s 177F(1) in the event that either the secondary or tertiary counterfactual is ‘preferred’ is contrary to the authority of this Court in Federal Commissioner of Taxation v Jackson (1990) 27 FCR 1. It follows from the decision in Jackson that prior to the introduction of s 169A(3) of the 1936 Act, determinations purporting to cancel a tax benefit had to be made prior to assessment and could not effectively be made by the Court. Section 169A(3) partially ameliorated the effect of Jackson by permitting the Commissioner to make determinations at the time he determined an objection, but that was not the course the Commissioner adopted in this case.

30. In oral submissions, MAHPL contended that:

    (a)Federal Commissioner of Taxation v Jackson (1990) 27 FCR 1 (Jackson) is authority for the proposition that the Commissioner can only make a Pt IVA determination at or prior to the issue of an assessment and that the assessment must give effect to the determination;

    (b)as a result of Jackson, parliament amended s 169A and introduced s 169A(3), which gave the Commissioner the power to make fresh determinations at the objection stage, thus overcoming the problem in Jackson; and

    (c)the Commissioner could have, but did not, make fresh determinations at the objection stage, and is out of time to do so now.

31. The Commissioner’s position was that Jackson and s 169A(3) were not relevant, and that:

    Any further amended assessment issued to MAHPL to reflect the tax benefit worked out by reference to the Secondary Counterfactual or Tertiary Counterfactual (or some variant thereof) would either give effect to the pre-existing s 177F determinations or, if necessary, fresh s 177F determinations made at the conclusion of the appeal.

32. MAHPL’s contentions based on Jackson and the legislative history of s 169A were misconceived. Section 169A(3) provides as follows:

    In determining whether an assessment is correct, any determination, opinion or judgment of the Commissioner made, held or formed in connection with the consideration of an objection against the assessment shall be deemed to have been made, held or formed when the assessment was made.

33. Section 169A of the ITAA36 was introduced by s 19 of the Taxation Laws Amendment Act 1986 (Cth), and took effect on 24 June 1986, upon receiving royal assent. Sub-section (3) was part of s 169A when it was originally inserted into the ITAA36; it was not added by amendment of s 169A in response to Jackson, which was only decided at first instance on 21 April 1989, and on appeal on 31 October 1990. Section 169A was amended on two occasions after it was initially introduced into the ITAA36, but neither amendment concerned s 169A(3).

34. Further, Jackson involved a circumstance where a Deputy Commissioner of Taxation purported to make s 177F determinations while an appeal against an objection decision disallowing objections to amended assessments was already on foot. At first instance, Gummow J noted that Pt IVA had, before the making of the determinations, played no part on the processes of assessment for the two years in question and that to allow Pt IVA to intrude into the matters of which the Court was seized, when litigation was already on foot, would be to “change the nature of those matters from challenges to the decisions of the respondent some years ago to disallow the taxpayer’s objections to particular amended assessments”: Jackson v Federal Commissioner of Taxation (1989) 87 ALR 461 at 475.

35. Both Gummow J at first instance and Hill J (with whom Burchett and Von Doussa JJ agreed) on appeal (at 17), confirmed that determinations are to be carried into effect by the making of amended assessments, not vice versa. In explaining his Honour’s view, Hill J likewise stressed (at 19–20) that the alternative view would mean that, if at the time the taxpayer elected to proceed in the Federal Court (and not the AAT), the Commissioner had not, by a determination, put Pt IVA in issue, the taxpayer’s election as to forum (which is a matter of real consequence in view of the administrative functions of the AAT) would be compromised by the later introduction of Pt IVA issues; the taxpayer would irrevocably lose its right to merits review on the Pt IVA issues.

36. In my view, Jackson is not authority for propositions of the breadth stated by MAHPL. As set out, Jackson involved the making of determinations to bring in Pt IVA while litigation was on foot, when no Pt IVA issues had hitherto arisen. That is very different from this case, which has been conducted on the basis of Pt IVA issues all along, and the taxpayer and the Commissioner have fully engaged on the secondary and tertiary counterfactuals.

37. While the terms of s 169A(3) do not avail the Commissioner if it be the case that fresh determinations are required, neither side addressed any submissions to the ambit of the Court’s power under s 14ZZP of the TAA, or the Commissioner’s capacity to amend his existing determinations under s 14ZZQ of the TAA, although the Commissioner referred to them briefly in opening. Those provisions provide as follows:

    14ZZP  Order of court on objection decision

    Where a court hears an appeal against an objection decision under section 14ZZ, the court may make such order in relation to the decision as it thinks fit, including an order confirming or varying the decision.

    14ZZQ  Implementation of court order in respect of objection decision

    (1)When the order of the court in relation to the decision becomes final, the Commissioner must, within 60 days, take such action, including amending any assessment or determination concerned, as is necessary to give effect to the decision.

    (2)      For the purposes of subsection (1):

    (a)  if the order is made by the court constituted by a single Judge and no appeal is lodged against the order within the period for lodging an appeal—the order becomes final at the end of the period; and

    (b)  if the order is made by the court constituted other than as mentioned in paragraph (a) and no application for special leave to appeal to the High Court against the order is made within the period of 30 days after the order is made—the order becomes final at the end of the period.

1. Of course, the question of the issue of further or amended determinations only arises if the Commissioner were to have prevailed in the ultimate outcome. It is not immediately apparent why s 14ZZQ would not allow the Commissioner to amend his determinations (if amendment be necessary at all) in order to give effect to this Court’s decision. However, as I have concluded the dominant purpose issue in MAHPL’s favour, the question of the amendment of determinations does not strictly arise and it is not necessary to express a concluded view.

2. My observations regarding s 14ZZQ ought also not be understood to suggest a concluded view that the existing determinations were not effective to support any amended assessments that may subsequently have been issued, had I concluded the dominant purpose enquiry adversely to MAHPL. As I set out below, the relationship between the determinations and the secondary and tertiary counterfactuals (and necessarily by extension, the preferred counterfactual) and the impact of Channel Pastoral Holdings Pty Ltd v Federal Commissioner of Taxation (2015) 232 FCR 162; [2015] FCAFC 57 (Channel Pastoral) on the capacity of the existing determinations to support counterfactuals other than the primary counterfactual is a matter that is of some complexity, but which does not arise for determination on this case, and was not fully argued.

   CHANNEL PASTORAL ARGUMENT

3. MAHPL also argued that, contrary to the stipulation in Channel Pastoral that an assessment issued to give effect to a s 177F determination must be “consistent, in all material respects, with the postulate upon which that determination is predicated” (Channel Pastoral at [81] (Edmonds and Gordon JJ)), the assessments issued to MAHPL were not consistent with the primary counterfactual because, on that counterfactual, MAHPL and MAPL would not have been incorporated at all. This contention was elaborated upon by MAHPL in its written and oral submissions.

4. MAHPL’s Channel Pastoral contention has apparent merit in relation to the primary counterfactual. However, as I have rejected the primary counterfactual, it is not necessary to say any more about it.

5. MAHPL also raised the Channel Pastoral point in relation to the secondary and tertiary counterfactuals, submitting as follows (footnote omitted):

   If the Secondary or Tertiary Counterfactual is adopted, it would still be the case that the determinations and assessments were not “consistent, in all material respects, with the postulate upon which that determination is predicated”. The postulate upon which the determination was predicated was the Primary Counterfactual, being that MAHPL is not incorporated and would not have formed a TCG [tax consolidated group]. That postulate is inconsistent with the Secondary and Tertiary Counterfactuals which provide that MAHPL would have been incorporated and would have formed a TCG … This is not merely a matter concerning the “quantum” or “amount” of a tax benefit to which the comments made by Dowsett and Gordon JJ in Federal Commissioner of Taxation v Trail Bros Steel and Plastics Pty Ltd (2010) 186 FCR 410 in the passage cited at RS[320] were directed. Rather, the problem is more fundamental; the postulate underpinning the current s 177F determinations is materially different from that underpinning the Secondary and Tertiary Counterfactuals.

6. MAHPL did not otherwise elaborate on the Channel Pastoral argument insofar as it concerned the secondary and tertiary counterfactuals save to submit in oral closing submissions that those counterfactuals, which posited a lesser borrowing (but still a borrowing by MAPL), were not consistent with the postulate behind the determinations, which was that MAPL would never have been incorporated and there would not have been a consolidated group.

7. In view of the conclusion I have reached as to the dominant purpose enquiry and in light of the lack of detailed argument on the point, it is not necessary to reach a concluded view on the Channel Pastoral point raised by MAHPL in relation to the secondary and tertiary counterfactuals.

8. Nevertheless, I will make two observations. The first is that the basis upon which MAHPL contended that the secondary and tertiary counterfactuals were inconsistent with the determinations has a logical flaw. As MAHPL submitted, in issuing amended assessments which assumed the continued existence of MAHPL as a taxpayer and parent of MAPL, when the primary counterfactual proceeded on the basis that both MAHPL and MAPL would never have been incorporated, the determinations were ostensibly inconsistent with the primary counterfactual. But those features make that conceptual premise of the determinations consistent with the secondary and tertiary counterfactuals, not inconsistent.

9. Secondly, to the extent that the determinations were issued on the basis of calculations of the tax benefit which assumed no debt financing of the acquisition of Alphapharm, whereas the secondary and tertiary counterfactuals assumed significant debt financing, it is not obvious that that is an issue of the kind referred to in Channel Pastoral, cf being a matter of detail or calculation within the ambit of Trail Bros.

10. As the Commissioner emphasised, the issue of a determination is an administrative matter: Deputy Commissioner of Taxation (Cth) v Richard Walter Pty Ltd (1995) 183 CLR 168 at 178 (Mason CJ); Macquarie Bank at [137] (Middleton and Robertson JJ); WR Carpenter Holdings Pty Ltd v Federal Commissioner of Taxation (2007) 161 FCR 1; [2007] FCAFC 103 (WR Carpenter) at [43] and [48] (Heerey, Stone and Edmonds JJ). The authorities emphasise that the exercise of the Commissioner’s discretion under s 177F(1) is not made to depend on the Commissioner’s opinion or satisfaction (that is, his state of mind) as to whether there is a tax benefit and, if so, whether it was obtained in connection with a scheme; they are matters of objective fact: Peabody at 382; Trail Bros at [57]–[58] (Dowsett and Gordon JJ) and WR Carpenter at [48]. Relatedly, in a Pt IVC appeal against an objection decision, the taxpayer’s burden is to show that the assessment is excessive or otherwise incorrect and what the correct amount should be: s 14ZZO of the TAA.

11. Channel Pastoral does not have the effect of binding the Commissioner to the approach taken in calculating the relevant tax benefit the subject of the determination. As the Full Court (Wigney, Banks-Smith and Colvin JJ) recently stated in Singapore Telecom Australia Investments Pty Ltd v Commissioner of Taxation [2024] FCAFC 29 (at [292]):

    [Channel Pastoral] did not state a broad proposition that once a determination is made under s 177F then the Commissioner is bound to adhere to the reasoning upon which the determination was based for the purposes of any statutory appeal to this Court in which liability to tax is said to depend upon the determination. A proposition of that kind would be counter to well established authority that, on an appeal to this Court, the Commissioner does not need to demonstrate the correctness of the analysis by which the disputed assessment was made.

12. The determinations themselves disallow deductions in the stated amounts. The determinations do not effectively incorporate by reference the detail of the analytical path by which those amounts have been identified by the Commissioner as tax benefits liable to be disallowed in accordance with Pt IVA. While there are cases — Channel Pastoral is one such case — where the assessment has no coherent relationship with the anterior determination, I am not persuaded that this is such a case, insofar as the secondary and tertiary counterfactuals (and any variations of them) are concerned. However, for the reasons noted, it is not necessary to reach a concluded view on this point.

    CONCLUSION

13. It follows from the foregoing that MAHPL has met its burden of establishing that the amended assessments in question were excessive or otherwise incorrect. I will direct the parties to propose orders giving effect to these reasons. If the parties disagree on the appropriate outcome as to costs, they are to file and serve any submissions on costs (limited to four pages) by 27 March 2024, with any responsive submissions (limited to two pages) by 29 March 2024.

I certify that the preceding six hundred and four (604) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Button.

Associate:

Dated:       20 March 2024