ATO SingTel victory puts profit shifters ‘on notice’
The ATO’s multinational focus has once again paid dividends in a decision of the Full Federal Court to uphold its tax ruling over SingTel’s Optus acquisition.
The Full Federal Court has upheld a landmark decision to deny interest deductions on debt issued between SingTel’s subsidiaries in relation to its Optus telecommunications acquisition.
In dismissing an appeal from SingTel, the Full Federal Court confirmed the company had claimed a transfer pricing benefit for deductions based on interest paid on loans between two subsidiaries.
ATO Deputy Commissioner Rebecca Saint said the ruling should put taxpayers who set “excessive prices for their related party dealings” as a way to transfer their profits to low-tax jurisdictions on notice.
In 2001, Singtel Group acquired Optus’ Australian telecommunications business, Cable and Wireless Optus Ltd (CWO). Just under one year later, Singtel then told 100 per cent of its issued capital in CWO to its subsidiary, Singapore Telecom Australia Investments Pty Ltd (STAI) for approximately $9 billion in equity and $5.2 billion in loan notes.
The loan notes initially had an interest rate of bank bill swap rates plus one per cent interest per annum. These notes were then amended three times. Firstly, they were amended in 2002 to change the maturity by one day, then in 2003 to qualify the accrual and payment of interest based on Optus’ financial performance with associated premiums, and a third time in 2009 to change from a floating to a fixed interest rate of approximately 6.8 per cent.
By operation of these amendments, the applicable interest rate was 13.2 per cent, with a total deduction of $4.9 billion claimed.
The Tax Commissioner denied approximately $895 million worth of deductions claimed between 2010–2013. On Friday, the Full Federal Court upheld the findings of the Tax Commissioner and the primary judge in agreeing.
In denying SingTel’s appeal, the Full Federal Court agreed the taxpayer had obtained a transfer pricing benefit.
The Court concluded that had the parties been independent of one another (and not subsidiaries) the second and third amendments, especially the change to the rate premium, would not have been agreed to, given they lacked disinterested commercial grounds.
This is although the Court agreed the overall interest paid fell within the range that arms-length parties might have agreed to pay.
In upholding the decision, the Court gave further legitimacy to the earlier Chevron and Glencore decisions, which concerned similar arm’s length transaction principles.
Saint said the decision marked “another win for the Tax Avoidance Taskforce towards maintaining the integrity of the Australian tax system and holding multinationals to account.”
“Whilst many large businesses are meeting their tax obligations, there are some that continue to engage in profit-shifting practices,” added Saint.
Saint said the Taskforce has, to date, prevented claims of approximately $45 billion in past and future interest deductions and collected $29.5 billion in additional tax revenue from multinationals and large public and private businesses.
