On Monday 20 December 2021, the AFR reported on the Friday 17 December decision of Justice Moshinsky, in the Federal Court, which found against the taxpayer on transfer pricing interest deductibility issues (see related TT article). The AFR Article is set out below.
Singapore Telecommunications has failed in an attempt to get almost $895 million deducted from taxable income it earned through Optus earlier last decade, as the Australian Tax Office continues its crack down on tax avoidance by multinationals.
SingTel had attempted to claim the deductions based on interest paid on loans between two of its subsidiaries regarding its 2001 acquisition of Optus but, in a landmark decision on Friday, the Federal Court said the lending did not comply with “arms length” requirements.
This principle requires that companies within the same multinational groups behave as though they are independent parties when transacting with each other to ensure they are not entering deals geared towards enabling tax avoidance.
When purchasing Optus in 2001, the Australian-based Singapore Telecom Australia Investments (Oz Resident Sub) issued shares and loan notes to its subsidiary SingTel Australia Investments, which is incorporated in the British Virgin Islands (Sing Resident Sub).
Oz Resident Sub then became a subsidiary of Sing Resident Sub – the roles were reversed – though both remained under parent company SingTel, which is registered in Singapore.
Singtel then claimed tax deductions for interest of almost $895 million paid on loans between the two subsidiaries from 2010 to 2013.
But the Tax Commissioner’s office rejected the claim as it ramped up its scrutiny of multinationals using cross-border financing or transfer pricing set-ups to cut their taxable income, and the Federal Court upheld that decision on Friday.
Referencing the “arm’s length” principle, Justice Mark Moshinsky pointed to several aspects of the loan agreements that differed to what independent private companies could expect to receive.
These included the fact that both parties were wholly owned by the same corporation and that executive roles across the organisations were shared.
He also pointed to the fact that the arrangement gave Sing Resident Sub the power to demand payment of interest at any time it chose and a provision that required SAI to treat interest accrued under the agreements as not accrued if the parent company so ordered.
He said it was not realistic to expect an independent enterprise to agree to a loan on such terms.
“The terms [of the loan arrangements] … exposed each party to significant commercial risk,” the judge said.
“There does not appear to be any commercial rationale for these terms. It is very difficult to see why independent enterprises would agree to such terms.”
The Tax Office recently had a string of wins on cross-border tax issues, and warned companies last year that it would pursue them for tax avoidance if they were intentionally reducing their taxable income by diverting profits or engaging in transfer pricing.
The SingTel case builds on its victories in doing this, including an agreement for BHP to pay $529 million over a dispute relating to its offshore marketing hubs and a long-running case against Chevron in 2017 over a similar related-party loan issue.
In that matter, the oil giant charged its Australian arm interest rates of 9 per cent on loans from a US-based subsidiary despite the cost of finance being at least 2 per cent lower.
More than $80 billion worth of loans have been restructured to avoid similar action since that judgment.
SingTel said it was considering Justice Moshinsky’s judgment and would update investors on its “next steps … on a timely basis”. The interest rates of Sing Resident Sub and Oz Resident Sub’s loan agreements were not challenged by the ATO.
[Tax Month – December 2021 – Previous 2021] 30.12.21]