SYDNEY (BLOOMBERG) – Australia on Friday (Dec 17) won a landmark court ruling against Singtel, a victory in the country’s battle against tax avoidance by multinational companies through cross-border financing arrangements.
The Federal Court of Australia on Friday dismissed the company’s appeal against a tax assessment related to the acquisition financing of Singtel Optus in 2001.
Transactions between two wholly-owned Singtel units “differed from those which might be expected to operate between independent enterprises dealing wholly independently with one another”, Judge Mark Kranz Moshinsky wrote for the court.
Tax experts warned in the aftermath of the decision that multinationals should expect scrutiny on intra-group financing that does not appear to have taken place at arm’s length as if it were done between two unrelated parties.
The arm’s-length principle is an often-contentious aspect of transfer pricing rules that govern transactions between companies within the same multinational group to make sure they are not abused for tax reasons.
The Australian Tax Office (ATO) “has had a laser focus on multinationals’ cross-border financing for many years now”, said Ms Angela Wood, Melbourne-based tax partner at law firm Clayton Utz.
“Transfer pricing, particularly for related-party financing, has been the single most important focus area for the ATO in recent times,” she said.
“The Singtel case has endorsed many key principles that underlie various Australian transfer pricing provisions that have previously been debated,” said Ms Jacqueline McGrath, special counsel at HWL Ebsworth Lawyers, citing the multi-year Chevron and Glencore disputes.
The case stretches back to Singtel’s 2001 purchase of Cable and Wireless Optus, which operated one of Australia’s largest telecommunications businesses, known locally as Optus.
Domestically incorporated Singapore Telecom Australia Investments (STAI) subsequently issued shares and loan notes under a loan note issuance agreement (LNIA) to British Virgin Islands-registered subsidiary SingTel Australia Investments (SAI).
STAI became a wholly-owned subsidiary of SAI in 2002, issuing loans and later paying interest to SAI, which is tax resident in Singapore. Both entities have been entirely owned by the parent company Singtel of Singapore.
The loan agreements put in place during the purchase process set interest rates due on loans between the two entities, which the ATO took issue with almost 15 years later.
In October 2016, the Australian Tax Commissioner contested tax deductions claimed for interest paid on the loans in the tax years ending March 31 2010, 2011, 2012 and 2013.
This assessment meant STAI had fewer losses to carry forward for tax purposes from 2010, ultimately meaning it would owe just under A$895 million (S$872 million) in additional taxes.