On 21 April, the Full Federal Court ruled against Chevron Australia after the company borrowed US$2.5 billion at a high interest rate from a US related company.
The Australian Taxation Office (ATO) argued that the rate of interest charged on the loan, established in 2003, was not at arm’s length which is required under transfer pricing rules. Chevron Australia is reviewing the decision which may yet be appealed to the High Court.
Transfer pricing is not only an issue for large multinationals, as it applies to all businesses with cross border related party dealings. However, for small to medium businesses, there are important safe harbour rules that allow for reduced record keeping and compliance requirements.
It is also important not to confuse the transfer pricing rules with thin capitalisation rules, that also affect debt deductions. The thin capitalisation rules generally only operate where debt deductions exceed $2 million (including associates).
Learn more about international dealings with related parties for your business from Andrew Lam here.