Singapore Telecom Australia Investments Pty Ltd v Commissioner of Taxation, [2024] FCAFC 29

The taxpayer (“STAI”) - a wholly-owned Australian subsidiary of a Singapore public company (Singapore Telecommunications Limited, or “SingTel”) - purchased in June 2002 all the shares of an Australian telecommunications company (“SOPL”) from another wholly-owned subsidiary of SingTel (“SAI”), which was accepted to be a Singapore enterprise. SAI provided $5.2 billion of vendor financing pursuant to a facility termed a Loan Note Issuance Agreement (LNIA). The LNIA had a term of 10 years and provided for interest at the one year bank bill swap rate from time to time plus 1% (and with a withholding tax gross-up). However, SAI had the right to effect deferral of the interest through the issue of a variation notice. The cash flow of STAI on its investment in SOPL initially was insufficient to service the loan interest, and interest for the tax year ending on March 31, 2003 (in an aggregate amount of $286 million) was so deferred.

Under an amendment of the LNIA made on March 31, 2003 (the “second amendment”), such accrued interest was forgiven, a profitability benchmark was introduced so that no interest would be payable unless that benchmark was met and the (now contingent) rate of interest was increased by a further 4.552% per annum of the principal, which was designed to equate the overall interest to be paid over the term of the LNIA to the equivalent economic value of the interest that would have been payable if the amendment had not been made.

The third amendment made on March 30, 2009 replaced the variable interest rate with a fixed rate of 13.2575% for the balance of the loan term.

The Commissioner applied the Australian transfer-pricing rules (which referenced the related-person Article of the Singapore-Australia Treaty, and tested whether conditions operated between the two enterprises (STAI and SAI) in their commercial or financial relations which differed from those which might be expected to operate between independent enterprises dealing wholly independently with one another) to substantially reduce the interest claims of STAI for its tax years ending on March 31, 2011, 2012 and 2013.

The primary judge had found that independent parties in the positions of SAI and STAI might have been expected to have agreed at the time of the notes’ issuance that the interest rate applicable to the notes would be the rate actually agreed and that such interest rate could be deferred and capitalized. This interest rate took into account that, in such circumstances, there would be a guarantee by the parent (SingTel), given that it would not be commercially rational to bear the significantly higher interest rate that would have been required without such a guarantee, and it would have been reasonable for a party like SAI to seek security. Furthermore, no guarantee fee should be imputed as there was no evidence that under the hypothetical conditions the parent would have charged such a fee.

In addition, an independent party in the position of SAI would not have agreed to make the changes contained in the Second and Third Amendments.

The Full Court found no reversible error in the findings of the primary judge. It rejected the contention of STAI that the amount of interest actually paid over the 10 year period was equal to or less than that which might be expected to have been paid between independent parties in similar circumstances over the same period, as the transfer-pricing standard was required to be met on a tax year by tax year basis – and the Commissioner had the discretion to adjust the interest for earlier years upwards. Regarding the second amendment, it noted the primary judge’s finding that there did not appear to be any commercial rationale for it, and that it had been implemented to avoid withholding tax. It noted that it was consistent with applying the independent enterprises hypothesis having regard to the circumstances of each enterprise to impute that the creditor (SAI) would have required a parent guarantee for a $5.2 billion loan.

The taxpayer (“STAI”) - a wholly-owned Australian subsidiary of a Singapore public company - purchased in June 2002 all the shares of an Australian telecommunications company from a Singapore sister company (“SAI”). SAI provided $5.2 billion of vendor financing pursuant to a note facility that had a term of 10 years and provided for interest at the one year bank bill swap rate from time to time plus 1%. However, SAI had the right to choose to defer the payment of the interest, which it did for the first tax year given the initial low cash flow of STAI.

Under a loan amendment made at the end of the first taxation year (on March 31, 2003), the accrued interest was forgiven, a profitability benchmark was introduced so that no interest would be payable unless that benchmark was met and the (now contingent) rate of interest was increased by a further 4.552% per annum of the principal. A further amendment made on March 30, 2009 replaced the variable interest rate with a fixed rate of 13.2575% for the balance of the loan term.

The Commissioner applied the Australian transfer-pricing rules (which referenced the related-person Article of the Singapore-Australia Treaty, and tested whether conditions operated between the two enterprises (STAI and SAI) in their commercial or financial relations which differed from those which might be expected to operate between independent enterprises dealing wholly independently with one another) to substantially reduce the interest claims of STAI for its tax years ending on March 31, 2011, 2012 and 2013.

The primary judge had found that independent enterprises in the positions of SAI and STAI might have been expected to have agreed at the time of the notes’ issuance that the interest rate applicable to the notes would be the rate actually agreed (the swap rate plus 1%) and that such interest rate could be deferred and capitalized. This interest rate took into account that, in such circumstances, there would be a guarantee by the parent, given that it would not be commercially rational to bear the significantly higher interest rate that would have been required without such a guarantee, and it would have been reasonable for a party like SAI to seek security. Furthermore, no guarantee fee should be imputed as there was no evidence that under the hypothetical conditions the parent would have charged such a fee.

In addition, an independent party in the position of SAI would not have agreed to make the changes contained in the two amendments.

The Full Court found no reversible error in the findings of the primary judge. It rejected the contention of STAI that the amount of interest actually paid over the 10 year period was equal to or less than that which might be expected to have been paid between independent parties in similar circumstances over the same period, as the transfer-pricing standard was required to be met on a tax year by tax year basis – and the Commissioner had the discretion to adjust the interest for earlier years upwards. Regarding the 2003 amendment, it noted the primary judge’s finding that there did not appear to be any commercial rationale for it, and that it had been implemented to avoid withholding tax. It noted that it was consistent with applying the independent enterprises hypothesis having regard to the circumstances of each enterprise to impute that the creditor (SAI) would have required a parent guarantee for a $5.2 billion loan.