Pricing intercompany loans between related parties is a horrendously complicated exercise – so complicated that tax officers have long kept the whole subject in the Too Hard basket...until Chevron in 2002 set up a structure so simple, and so egregious, that the Federal Court of Appeal has radically redrawn the way multinationals operate in Australia.
The first effects are already being felt by Chevron Australia, with its $300 million-plus tax bill from its $US2.5 billion loan back in 2002.
The same principles adopted by the court will now be applied to more than $41 billion of borrowings for the Gorgon and Wheatstone projects.
All of these payments are now subject to ATO scrutiny, and if the High Court confirms the decision after the inevitable appeal then the effects will work their way through all multinational financing deals.
It's also a critical precedent that will be examined closely around the world.
Tax commissioner Chris Jordan referred to the case before the Senate tax inquiry two years ago: "Not to oversimplify it, basically, there was a borrowing at 2 per cent by the United States parent and an on-lending at 9 per cent," Jordan said.
"As I understand it, there were something like over 30 expert reports. There were 11 barristers in the case. It took years to get up, and, in my view – maybe I am just too simple here – that looked like a pretty straightforward issue."
Chevron Australia set up a US subsidiary which borrowed $US2.5 billion and loaned it to Chevron Australia. In a neat circle, Chevron Australia claimed a tax deduction for an average 9 per cent interest paid to its US subsidiary, which paid no US tax but shipped the profit it made on this cost arrangement back to Chevron Australia as tax-free dividends.
The result, as with most of these related-party finance deals, was double non-taxation. But the scale of the mark-up of the interest rate from 2 per cent to 9 per cent, then repatriating it back to Australia, bordered on the brazen.
It wasn't hard for Justice Alan Robertson to find against Chevron in October 2015, nor for the three Federal Court of Appeal judges on Friday to confirm his ruling. But the arguments here don't just apply to Chevron.
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