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Australia wins gold in the international transfer pricing games
The facts
Chevron Australia Holdings Pty Ltd (CAHPL), an Australian company, borrowed $US 2.5bn from its US resident subsidiary, Chevron Texaco Funding Corporation (CFC). This was an internal group borrowing, with interest payable by CAHPL at around 9% pa. CFC had borrowed the money on the US commercial paper market (an external borrowing) paying interest of about 1.2%.
Figure 1 below provides a diagrammatical representation of the transaction flows.
Figure 1: Flow of transactions between CAHPL, CFC and Chevron US
The parties involved
- Chevron Australia Holdings Pty Ltd (‘CAHPL’) (Borrower) is a wholly owned subsidiary of the US-based Chevron Corporation (‘Chevron US’) (Parent); and
- Chevron Texaco Funding Corporation (‘CFC’) (Lender), a special purpose financing subsidiary established to raise funds in US bond markets (with the benefit of a guarantee from the Parent).
The arrangement
- The cost of funds to CFC was less than US LIBOR (approximately 1-2%).
- A Credit Facility Agreement (the Facility) was entered into in June 2003 between CAHPL and CFC
- The facility between CAHPL and CFC was set out as follows:
- the Borrower borrowed the AUD equivalent of US $2.5bn;
- interest at 1m AUD LIBOR + 4.14% p.a (approximately 9%);
- loan repayable in full after five years,
- not subject to financial covenants and no guarantee or security was provided by or on behalf of the Borrower
- Dividends were paid annually by CFC to CAHPL.