I'm Damien Carrick, and this is the Law Report on RN, Radio Australia, ABC News Radio, and of course on your ABC radio app. Also available at the RN website you can download podcasts, read transcripts and leave comments.
It does sound like Australia strikes roughly the right balance when it comes to rules around private arbitrations. But according to the senate committee on corporate tax avoidance, we really need to lift our game when it comes to the way we tax multinationals. At committee hearings last week the main focus was on US energy giant Chevron, which is developing the Gorgon and Wheatstone LNG projects on the coast of WA. It's Australia's largest single capital investment, and last month the Federal Court ordered Chevron to pay the Australian Tax Office $269 million. A few days ago, Chevron announced it's appealing this ruling.
Jason Ward is the senior global strategist with the International Transport Workers' Federation. He is also the author of a report on Chevron's tax schemes called Piping Profits Out of Australia.
Jason Ward: Well, the case was a transfer pricing case, and a really landmark case and about the cost of money. So essentially what the court determined was that the money that Chevron lent itself between subseries in Delaware and Australia, the interest rates were not set at an arm's length manner, and therefore those interest rates were unnaturally reducing and intentionally reducing profits in Australia and therefore tax revenue to be collected.
Damien Carrick: As I understand it, the court found that the US arm borrowed money at 2% interest and then on-lent that money to Chevron Australia at 9% interest, and that effectively sucked the profits out of its Australian arm and therefore reduced its tax bill. Is that what the court found, in a nutshell?
Jason Ward: In a nutshell that's exactly what the court found. That was over a time period from 2004 to 2008. The total value of the loan was $2.5 billion. This case was very interesting because Chevron now has a $35 billion loan between its direct parent company in Delaware and Chevron Australia Holdings, the same company.
Damien Carrick: So last month the court ruled that Chevron would have to pay the Australian Tax Office $269 million because that price transfer was not, if you like, kosher.
Jason Ward: Right, it was not at arm's length and they were essentially creating unnecessary risk in order to justify a higher interest rate.
Damien Carrick: There's also another $35 billion loan, so presumably the ATO are after a similar equivalent amount for that larger $35 billion loan.
Jason Ward: In the report we wrote we suggested that over the life of this loan that could result in interest deductions for Chevron of the same value of the loan of about $35 billion. We were corrected on that, and they were asked to put a number on that they came back and said, well, it might be $15 billion, that's about half of the national annual education budget.
Damien Carrick: I should point out, the court made it very clear that this did not involve any of the anti-avoidance provisions of the Income Tax Act, and it did not make any allegations that the credit facility or the credit agreement was a sham. So it wasn't saying that Chevron had sought to do anything illegal.
Jason Ward: Right, that's correct, there is no illegality here, and that speaks to another issue in that there is a desperate need to change the laws so that this…I mean, I would consider it quite blatant efforts to reduce tax payments in Australia, to reduce profits in Australia. The laws need to be changed.
Damien Carrick: Last week Chevron appeared before the senate economics committee on tax avoidance. You attended those hearings. What was the tone of the exchanges between the committee members and Chevron?
Jason Ward: Well, it was quite a lively hearing. Chevron was on the same panel with its partners who were also part of the Gorgon project, Shell and Exxon, both of whom hold 25% interest in the Gorgon project. Chevron has about 47%. None of the questions were really focused on the activities of Shell and Exxon. Exxon actually did a remarkable job of coming forward and disclosing a breakdown of the taxes that it has paid and welcomed public oversight and public investigation into tax fairness. Almost every question was focused on Chevron. They came out of basically said, 'Look, we are spending a lot of money, Australia should be happy, there's no issue here, misinformation is being peddled by unions and the media.'
Damien Carrick: People like yourself.
Jason Ward: People like myself…
Damien Carrick: Who are, I should point out, a global strategist with the International Transport Workers' Federation.
Jason Ward: Absolutely, we are a global union federation, there's no denying that.
Damien Carrick: And I understand that Chevron's vice president and general tax counsel Sandy Macfarlane flew out from the USA to appear before the committee. What did Liberal Senator Sean Edwards have to say?
Jason Ward: Well, I think he was not really satisfied with what they were saying. To give you the prime example here, there was a series of questions with regards to the shipping operation for the north-west shelf venture. Chevron has a one-sixth interest with a number of other players, and that project has been going on for 30 years. The shipping company that ships the LNG from Western Australia to Asia, primarily Japan, is registered in Bermuda, and a series of questions were answered about why that is the case. And the answer was given back that Bermuda has a record of maritime safety. It's quite rare to hear 'Bermuda' and 'maritime safety' in the same phrase.
Damien Carrick: Liberal Senator Sean Edwards said with respect to the transfer pricing, 'They may not be doing anything that is illegal but they are certainly doing something that's immoral.' Is that your recollection of what he said?
Jason Ward: I believe he said that not in the hearings but in an interview during one of the breaks, so I didn't actually hear that.
Damien Carrick: Did you hear what ALP Senator Sam Dastyari said? I think he was very scathing.
Jason Ward: He was very scathing and has labelled Chevron as Australia's largest tax dodger.
Damien Carrick: Chevron says that the company's investments in Gorgon and Wheatstone, they are the biggest capital investments in Australia, they are yet to come online, and so they are not yet profitable. So when they do come online they will be extraordinarily profitable, and at that point that's when the money will flow into Australian government coffers.
Jason Ward: That's the question that I would really like to pose to Chevron and perhaps to the ATO and Treasury, is what is the estimate of when those projects will actually start making a net contribution in terms of tax revenues. As one example, there are two primary tax revenues related to these projects. One is obviously the corporate income tax, the other one is the petroleum rent resource tax, the PRRT. The chief economist for Goldman Sachs has said recently that despite the fact that there is this massive boom in LNG exports, there is not likely to be any additional PRRT revenues for the next decade. The oil and gas industry has amassed over $150 billion in PRRT tax credits, and won't be paying them until those are all deducted from their tax liability. And again, the effective rate of the PRRT has declined from about 25% 10 years ago to less than 6% in the most recent year that we have information for.
Damien Carrick: Indeed, as I understand it, iron ore is about to be surpassed by liquid natural gas as the country's chief export. So tax arrangements around this industry are becoming fairly crucial to the national future.
Jason Ward: Absolutely. I think this is really one of the number one issues in terms of revenue and budgets for decades to come.
Damien Carrick: Jason Ward, senior global strategist with the International Transport Workers' Federation, and author of a report on Chevron's tax schemes titled Piping Profits Out of Australia.
That's the Law Report for this week. Thanks to producer Anita Barraud and to technical producer Alex Stinson. I'm Damien Carrick, talk to you next week with more law.