(Bloomberg) — Australia on Friday won a landmark court ruling against Singapore Telecommunications, 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 of 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 doesn’t 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 aren’t abused for tax reasons.
The Australian Tax Office “has had a laser focus on multinationals’ cross-border financing for many years now,” said 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.”
“The Singtel case has endorsed many key principles that underlie various Australian transfer pricing provisions that have previously been debated,” said Jacqueline McGrath, special counsel at HWL Ebsworth Lawyers, citing the multi-year Chevron and Glencore disputes.
Facts of the Case
The case stretches back to Singtel’s 2001 purchase of Cable and Wireless Optus Ltd, 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 see an increased taxable income of just under A$895 million ($640 million). The primary tax would be A$268 million.
In December 2016, STAI lodged objections to the amended assessments, which the commissioner disallowed in 2019. STAI’s appeal against the commissioner’s decisions was the case heard Friday.
Singapore Telecommunications Ltd said in a statement: “After seeking to settle this matter with the ATO in good faith and failing to reach an agreement as to the application of the law, STAI sought clarity from the court process.”
Singtel noted that STAI’s holding company, SAI, would be entitled to a corresponding refund of withholding tax estimated at A$89 million.
Broader Impact
Wood and other experts predicted that other significant transfer pricing litigation may arise over time—and these could take years to resolve, in or out of court.
Looking ahead, the Singtel ruling suggests intra-company pricing of financing for major investments will continue to be met with closer regulatory scrutiny, said Kristie Schubert, tax partner at HWL Ebsworth Lawyer.
“If the arrangement in question would not have occurred if a member of a multinational group raised debt from a third party, it is then likely to come under scrutiny and could prove difficult to defend,” Schubert said. “The case is a timely reminder of the heavy evidentiary burden in transfer pricing cases, should a matter not be resolved and proceed to litigation.”
“The merging of quantitative and qualitative considerations makes establishing what is an arm’s length rate increasingly complex,” she added. “In the context of a loan, ratings agencies may view credit risk differently and base their decisions on different assumptions—or give more weight to certain risks or considerations.”
Her colleague McGrath pointed out that that such transfer pricing provisions often require highly specialized factual knowledge and voluminous documentation should a regulator review transactions years after they actually take place.
Singtel has 28 days within which to file an appeal, Wood said.
“The Singtel Group will consider the details of today’s judgment, explore available options and determine next steps,” the company said Friday. “It will also ensure material updates are provided to investors on a timely basis.”
It is committed to complying with tax obligations in markets where it has operations, it said, and noted that STAI is a significant taxpayer in Australia.
The ATO said it welcomes the decision.
The case is VID1231/2019: Singapore Telecom Australia Investments Pty Ltd v Commissioner of Taxation [2021] FCA 1597.
To contact the reporter on this story: Andrew Yeh in Taipei, Taiwan at correspondents@bloomberglaw.com
To contact the editors responsible for this story: Meg Shreve at mshreve@bloombergindustry.com; Joe Stanley-Smith at jstanleysmith@bloombergindustry.com
(Adds comment from ATO office in second to last paragraph in Dec. 17 story. Earlier version corrected figures for taxes owed in headline and 11th paragraph.)
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