Chevron is facing a $195-million bill after an Australian court ruled Friday the energy giant had minimised tax through a loan scheme, in a case that could have implications for other multinationals.
The decision comes amid an international push, including in Australia, to crack down on global firms using complex structures to lower their tax burden.
The Federal Court ruled that $2.45 billion in loans from Chevron's US branch to its Australian counterpart between 2004 to 2008 was not strictly a refinancing scheme, but was aimed at obtaining a benefit.
The decision means Chevron could be hit with a more than Aus$269-million ($195-million) bill.
The fee includes over Aus$180 million in back taxes, about Aus$45 million in penalties and interest worth at least Aus$44 million, the Australian Taxation Office said in a statement.
Chevron, which is developing one of the world's largest natural gas plants at Gorgon off the West Australian coast, could appeal the decision.
"Chevron Australia is considering the decision and its position with regard to any appeals," the company said in a statement.
Justice Alan Robertson said in his decision the transaction was not a "sham" but that the arrangements breached transfer pricing frameworks.
The case examined the amount of interest Chevron charged on the loans, with the funds provided to the US entity at an interest of about 1.2 percent and the company then lent to the Australian arm at nine percent.
Robertson wrote in the ruling that "refinancing was not the dominant purpose of the scheme".
"Refinancing could be achieved by borrowing at an arm's length interest rate, which CAHPL (Chevron Australia Holdings Pty Ltd) did not."
It was reasonable to conclude Chevron Australia set up the loans "for the dominant purpose of obtaining a 'scheme benefit'", he added.
- Name and shame -
The arm's length principle is part of transfer pricing, where goods and services are sold between different entities of a company.
It is meant to mimic a transaction that involves two separate firms, rather than a transaction between two arms of a company, to help international enterprises avoid double taxation.
The principle assumes both parties are acting out of self-interest.
But some firms allegedly use high transfer prices in higher-tax jurisdictions to minimise profit, thereby reducing taxes.
Deloitte tax partner Geoff Gill said the win for the Australian Taxation Office "will make it feel empowered to continue to pursue transfer-pricing cases".
"This case could have global implications because it is an interpretation of the arm's length principle in the context of financing," he told the Sydney Morning Herald.
The decision was welcomed by Labor senator Sam Dastyari, who chaired a recent parliamentary inquiry into corporate tax avoidance that called for the naming and shaming of multinationals shifting profits overseas.
Canberra last month introduced new legislation to require such firms to pay their "fair share of tax".
"I welcome the court's decision, and the signal that it sends to multinationals operating in Australia," Dastyari said in a statement.
"The tentacles of multinational corporations like Chevron must pay tax wherever they unfurl."
Chevron has 21 days to file an appeal to the court.