The Federal Court’s recent decision in Chevron Australia Holdings Pty Ltd (“CAHPL”) v Commissioner of Taxation (No 4) [2015] FCA 1092 is an important decision in relation to Australia’s transfer pricing law and the application of the arm’s length principle to financing issues.

The landmark ruling leaves Chevron facing a tax bill in excess of $300 million, as well as paying substantial costs. The case focused on the transfer pricing implications of an intercompany loan arrangement between CAHPL and its US subsidiary, ChevronTexaco Funding Corporation (“CFC”). The primary issue was whether the interest paid to CFC by CAHPL exceeded an arm’s length price for the borrowing.

The Court found in favour of the Commissioner of Taxation but called into question the evidence provided by a number of expert pricing witnesses. This could give rise to uncertainty going forward on how an arm’s length interest rate can be practically determined.