Singtel loses landmark Australian tax case

(Bloomberg) – Australia on Friday won a landmark court ruling against Singapore Telecommunications, a victory in the country’s battle against tax evasion by multinational companies through cross-border financing deals.

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The Federal Court of Australia on Friday dismissed the company’s appeal against a tax assessment related to the financing of the 2001 acquisition of Singtel Optus.

Transactions between two 100% owned SingTel units “differ from what one would expect from independent companies dealing completely independently of each other,” Judge Mark Kranz Moshinsky wrote for the court.

Tax experts have warned in the wake of the ruling that multinationals should expect scrutiny of intragroup financing that does not appear to have taken place independently, as if they were two independent 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 ensure that they are not abused for tax reasons.

The Australian Tax Office “has focused for many years on cross-border financing of multinationals,” said Angela Wood, Melbourne-based tax partner at law firm Clayton Utz. “Transfer pricing, especially related party financing, has been the most important area of ​​interest for the ATO in recent times. “

“The Singtel case enshrined many key principles underlying various Australian transfer pricing provisions that have already been debated,” said Jacqueline McGrath, special advisor at HWL Ebsworth Lawyers, citing Chevron’s multi-year disputes and Glencore.

Facts of the matter

The case dates back to Singtel’s 2001 purchase of Cable and Wireless Optus Ltd, which operated one of Australia’s largest telecommunications companies, known locally as Optus.

Singapore Telecom Australia Investments (STAI), a national company, subsequently issued shares and loan notes under a loan note issuance agreement (LNIA) to the 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 a Singapore tax resident. Both entities were wholly owned by parent company SingTel of Singapore.

The loan agreements put in place during the purchasing process set the interest rates owed on loans between the two entities, which the ATO disputed almost 15 years later. In October 2016, the Australian Tax Commissioner challenged tax deductions claimed for interest paid on loans in tax years ending March 31, 2010, 2011, 2012 and 2013.

This assessment meant that STAI had fewer losses to carry forward for tax purposes as of 2010, meaning it would ultimately be subject to just under A $ 895 million ($ 640 million) in additional taxable income.

In December 2016, STAI filed objections against the amended assessments, which the commissioner rejected in 2019. STAI’s appeal against the commissioner’s decisions was heard on Friday.

Singapore Telecommunications Ltd said in a statement: “After seeking to settle this matter in good faith with the ATO and failing to reach an agreement on law enforcement, STAI sought clarification on the judiciary process.”

Singtel noted that STAI’s holding company, SAI, would be entitled to a corresponding refund of withholding tax estimated at A $ 89 million.

Wider impact

Wood and other experts have predicted that other important transfer pricing disputes could arise over time, and these could take years to resolve, either in court or out of court.

Going forward, the Singtel decision suggests that intra-company pricing of major investment finance will continue to come under stricter regulatory scrutiny, said Kristie Schubert, tax partner at HWL Ebsworth Lawyer.

“If the arrangement in question would not have taken place if a member of a multinational group had incurred a debt with a third party, then it is subject to scrutiny and could prove to be hard to defend, ”Schubert said. “The case is a timely reminder of the heavy burden of proof in transfer pricing cases if a case goes unresolved and becomes the subject of litigation.”

“The merging of quantitative and qualitative considerations makes it increasingly complex to establish what an arm’s length rate is,” she added. “In the context of a loan, rating agencies may view credit risk differently and base their decisions on different assumptions, or give more weight to certain risks or considerations.

His colleague McGrath pointed out that such transfer pricing arrangements often require highly specialized factual knowledge and extensive documentation if a regulator reviews transactions years after they actually took place.

Singtel has 28 days to appeal, Wood said.

“The Singtel Group will review the details of today’s judgment, explore available options and determine next steps,” the company said on Friday. “It will also ensure that important updates are provided to investors in a timely manner.”

It is committed to complying with tax obligations in the markets in which it operates, he said, and noted that STAI is a significant taxpayer in Australia.

The ATO did not immediately respond to a request for comment.

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 [email protected]

To contact the editors responsible for this story: Meg Shreve at [email protected]; Joe Stanley-Smith at [email protected]

(Corrects the amount of tax obligations in the 11th paragraph)

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