BHP Billiton Wins Lengthy Tax Credits Case

by Mary Swire, Tax-News.com, Hong Kong

07 June 2011

The High Court of Australia has upheld the ruling of the Federal Court that BHP Billiton properly applied the arm's length principle in writing off debt accumulated by its financing subsidiary from a loan provided to an ill-fated subsidiary formed to undertake an iron ore project in Boodarie, Western Australia. As a result of the ruling, the mining giant can now claim AUD554m (USD580m) in tax credits.

The case centered on an interest-bearing loan provided by BHP's finance unit to the subsidiary charged with the Boodarie project. After plans were abandoned in 2005, AUD1.85bn was written off as bad debt and BHP sought to claim tax credits as a result of the loss.

BHP claimed AUD603m in capital allowance deductions for the tax years 2003-2006 but this was disputed by the tax authority in 2007.

The tax authority questioned the loan transaction between the related parties on two points including whether the transaction had occurred at arm's length – a principle which requires intra-group transactions to occur under commercial terms which would otherwise have been in place if the two entities were not related – necessary as both entities were BHP subsidiaries. In particular, BHP's eligibility to the tax credits, the tax authority argued, depended on whether or not the debt could, as it argued, be classified as 'limited-recourse debt'; and whether the finance unit had acted as if it were an unconnected party when structuring and writing off the loan.

The High Court upheld the decision of Federal Court Judge Michelle Gordon in 2009 that the debt to the financing unit was not 'limited-recourse debt' and consequently that the financing unit, acting as if it were an unrelated party, was within its rights to force (unlimited) repayment of the entire loan amount and, if necessary, to force the BHP plant subsidiary plant into bankruptcy. In the case of limited-recourse debt creditors receive a guarantee that they will receive 25% of the loan amount back but this arrangement limits eligibility to full tax credits as the maximum amount reclaimable is limited in itself. The High Court upheld that the financing unit had unlimited claim to repayment of the full loan amount and that it had sufficiently applied the arm's length principle, granting it eligibility to claim full tax credits.

BHP will benefit from approximately USD580m in income tax credits, which will be accounted for in its 2010/11 accounts due to be published at the end of June.

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