The recent decision by the Full Federal Court in Chevron Australia Holdings Pty Ltd v Commissioner of Taxation  FCAFC 62 is a watershed, not only in Australia but internationally. It provides important insights into how the arm’s length principle takes account of the economic, market and business conditions in which a multinational has to operate. It explores the potential implications arising from the different business practices multinationals adopt for their dealings with independent external entities and those they use for intra-group dealings. The decision may well have impacts beyond the immediate context of intra-group financing, and suggests the latest version of Australia’s transfer pricing rules (Subdivision 815-B) has a sound foundation.
Importantly, the Full Court found that when pricing related party loans Australia’s transfer pricing rules allow the relevant subsidiary to be seen as part of the wider international group and do not require it to be viewed as a stand-alone entity. A significant breakthrough is the articulation of a reasonable expectation test based on rational commercial behaviour, similar to the approach Australian courts have taken to the operation of the general anti-avoidance provisions in Part IVA. The Full Court explains this as an evaluative prediction of events and transactions based on evidence and, where appropriate, admissible, probative and reliable expert opinion as to what might reasonably be expected if the actual agreement had been unaffected by the lack of independence and the lack of arm’s length dealing.