FEDERAL COURT OF AUSTRALIA

Chevron Australia Holdings Pty Ltd v Commissioner of Taxation (No 3) [2014] FCA 999

THE COURT ORDERS THAT:

1.    The application be allowed.

2.    The following witnesses are granted leave to testify by video link:

(a)    Sezaneh Taherian; and

(b)    Caroline Silberztein.

3.    The cost of the application be costs in the cause.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

INTRODUCTION

1    This is an interlocutory application I heard on 11 September 2014. The substantive proceeding is set down for hearing for five weeks commencing 29 September 2014 before Robertson J.

2    The applicant sought the leave of the Court for two of its witnesses to testify by video link:

(1)    Ms Sezaneh Taherian; and

(2)    Ms Caroline Silberztein.

The application was opposed by the respondent (“Commissioner”).

3    Ms Taherian has sworn an affidavit dated 22 April 2013 which was filed on 26 April 2013. Ms Taherian is a lay witness who worked in the Treasury group of Chevron Corporation from the second half of 2001 until 2005. She then held various positions outside the Treasury group including positions outside the United States before leaving Chevron Corporation to work for another energy company in a financial planning and budgetary role in 2010.

4    Ms Silberztein has sworn an affidavit dated 13 August 2014 to which is annexed a written report marked “CS-3”, Ms Silberztein is an expert witness. She has been a partner in Baker & McKenzie in Paris since September 2011, specialising in taxation and transfer pricing. Prior to this, from 2001 to 2011, she was the head of the OECD Transfer Pricing Unit and Secretariat to Working Party No 6 on the Taxation of Multinational Enterprises.

5    At the conclusion of the hearing, I granted the applicant leave for Ms Silberztein to testify by video link and reserved on the interlocutory application in relation to Ms Taherian. What follows are my reasons for granting the applicant leave for Ms Taherian to also testify by video link.

BACKGROUND

6    This proceeding has a somewhat chequered history. It was set down for hearing for two weeks commencing 30 September 2013 but those dates had to be vacated to allow the applicant to put on further evidence in response to evidence put on by the Commissioner close to the hearing dates.

7    By letter dated 28 August 2013, the Commissioner’s solicitors informed the applicant’s solicitors that the Commissioner agreed to Ms Taherian and Mr Richard Edward Lee providing their evidence by video link.

8    By letter dated 20 August 2014, the applicant’s solicitors wrote to the Commissioner’s solicitors in the following terms:

We refer to your letter of 28 August 2013 confirming that the respondent agrees to the applicant’s witnesses Sezaneh Taherian and Richard Edward Lee providing their evidence by video link. We would be grateful if you could confirm that this is still the case.

In addition, could you please let us know whether the Respondent:

a)    requires Ms Caroline Silberztein to be available for cross-examination; and

b)    if so, consents to Ms Silberztein, who is a partner at Baker & McKenzie in Paris, giving her evidence by video link.

We would be grateful for a response prior to 27 August 2014.

9    By letter of the same date, the Commissioner’s solicitors responded:

We refer to your letter dated 20 August 2014. The respondent requires Mrs Caroline Silberztein to be available for cross-examination.

At this stage, the respondent requires all of the applicant’s witnesses to be available for cross-examination in person at the hearing.

10    By letter dated 26 August 2014, the applicant’s solicitors responded:

We refer to your letter of 20 August 2014 requiring all of the applicant’s witnesses to be available for cross-examination in person.

Ms Taherian and Mr Lee

We request the Commissioner to reconsider his position in respect of two of the applicant’s lay witnesses, Ms Sezaneh Taherian and Mr Richard Edward Lee, and consent to the provision of their evidence by video link for the following reasons:

a)    Mr Lee, who lives in Williamsburg, Virginia, is in his sixties and has not worked for Chevron for a number of years;

b)    None of Mr Lee’s evidence in this matter has been objected to by the Commissioner;

c)    Ms Taherian, who has not been a Chevron employee for many years, is now the full time CFO of a glass processing company in California. Since March this year, she has taken on the role as acting CEO in addition to her role as CFO, after the appointed CEO was incapacitated by illness. Ms Taherian is thus a key executive of that company and October is expected to be a very busy time;

d)    Both witnesses have only filed short affidavits (5 or 6 pages) on background factual matters;

e)    The credit of these witnesses cannot be in issue, given that there is no significant dispute in this case as to the underlying facts;

f)    We note that by letter dated 28 August 2013, you consented to these witnesses providing their evidence by way of video link for the trial scheduled last year. We do not understand the basis for the Commissioner’s change in position given that no further evidence has been filed by either Ms Taherian or Mr Lee since that time.

Ms Silberztein

We also request the Commissioner to consent to one of the applicant’s expert witnesses, Ms Caroline Silberztein, providing her evidence by video link for the following reasons:

a)    Ms Silberztein works full time as a senior Partner at Baker & McKenzie in Paris, France and has extensive overseas commitments during October, including travel to and from the United Kingdom and India;

b)    Her evidence in this matter is confined to only a single narrow issue, that is the meaning and history of the OECD Transfer Pricing Guidelines;

c)    She has not been asked to consider, or assume, any factual matters; and

d)    As an independent expert, her credit cannot be in issue.

We would be grateful for your earliest response on this issue. You will appreciate that if the Commissioner maintains his current position, the applicant may seek to have the matter listed for directions.

11    Finally, on 2 September 2014 the Commissioner’s solicitors responded:

We refer to your letter of 26 August 2014 asking whether the Commissioner will reconsider his position requiring Mr [sic] Taherian, Mr Lee and Ms Silberztein to be available for cross-examination in person.

The respondent has considered your request and we require each of Mr [sic] Taherian, Mr Lee and Ms Silberztein to be available for cross-examination in person.

12    On the hearing of the application, the applicant read an affidavit of Michael Andrew Clough sworn 8 September 2014 (Ex 1). Mr Clough was not required for cross-examination. At paras 12–16 of his affidavit Mr Clough deposed:

12.    Mr Lee has sworn an affidavit on 17 April 2013 which has been filed in these proceedings (see Court Book volume 3, tab 16). Mr Lee has not sworn any further affidavits in relation to these proceedings since the Respondent agreed on 28 August 2013 to Mr Lee giving his testimony by video link.

13.    The Respondent has not objected to any of Mr Lee’s evidence in the “Respondent’s Note on Outstanding Objections, and Parts of Evidence not Read” dated 20 August 2014.

14.    Mr Lee’s affidavit is seven pages long and is referred to four times in the 531 footnotes in the Applicant’s outline of written submissions and four times in the 354 footnotes in the Respondent’s outline of written submissions.

15.    I have been informed and I believe that:

(a)    Mr Lee is retired and aged in his sixties;

(b)    he resides in Williamsburg in the State of Virginia in the United States; and

(c)    he has not been an employee of Chevron Corporation or any of its subsidiaries since November 2008.

16.    In light of Maddocks’ letter of 2 September 2014 and the relative insignificance of Mr Lee’s evidence, the Applicant no longer proposes to read Mr Lee’s affidavit sworn 17 April 2013.

MS TAHERIAN’S AFFIDAVIT EVIDENCE

13    Ms Taherian’s affidavit relevantly reads:

2002/2003 Australian refinancing

My role in Treasury

8    My position within the Treasury Department was Director of International Financing. In that role I was responsible for refinancing Texaco debt (after the merger), reviewing and optimising capital structures, arranging intercompany payments such as dividends and loans, and arranging bank financing.

9    …

My role in the refinancing

10    In around April 2002, Mr Sheppard asked me to assist in an aspect of the review of the capital structure of the Australasian Business Unit (“ABU”), also called the Australasian Strategic Business Unit (“ASBU”). Although I do not recall the specific details of the conversation, I was told by Mr Sheppard that it was proposed that a new finance company, which became known as ChevronTexaco Funding Corporation (“CFC”) would raise money by the issue of US dollar denominated commercial paper in the United States and would on-lend those funds (converted into Australian dollars) to the new parent company of the ABU, which became known as Chevron Australia Holdings Pty Ltd, (“CAHPL”). The new parent company had been incorporated to hold both of the Chevron and Texaco businesses in Australia.

11    In particular, I was asked to help the ABU obtain advice from Goldman Sachs (“GS”) and Deutsche Bank (“DB”) about the level and pricing of debt to be provided to the ABU. I understood that the purpose of this exercise was to ensure that the amount of debt, and the interest rate that was applied to that debt, was consistent with that of a market or “arm’s length” loan. I was aware that this debt was to refinance other loans that had been made to fund earlier returns of capital from Australia to the United States but I was not involved in those earlier transactions.

12    From my experience, I understood that to raise money in the commercial paper market, CFC would need a guarantee from Chevron Corporation in order to achieve attractive pricing in that market. I also expected from my experience in arranging and implementing intercompany loans in the Chevron group that the intercompany loan from CFC to CAHPL would not be guaranteed. In my time at Chevron I had been involved in implementing many intercompany loans and cannot recall any intercompany loan that had a parent company guarantee.

13    …

Engaging Goldman Sachs and Deutsche Bank

14    …

15    In my initial discussions with both GS and DB I asked them to consider the appropriate amount of debt the ABU could raise. One of the banks, I cannot recall which, informed me that in order to answer that question they would have to make an assumption about the credit rating of the borrower. After discussions between Chevron Treasury officers, I informed both banks that they should initially assume that the borrower would be rated BBB on the Standard & Poors credit rating scale. The BBB rating is the lowest investment grade rating and as such seemed to me to be an obvious starting point.

16    I recall having discussions with Mr Roger Haley, a fellow Treasury employee, in which we spoke about the impact of the amount of debt in the ABU on its credit rating. The higher the level of debt, the more likely it was that the ABU would be assigned a lower credit rating. I understood that the effect of providing the BBB rating as an assumption to the banks could have the effect of limiting the amount of debt the ABU could raise. However, I expected that we would refine the assumptions we required the banks to make as the work progressed. It was not proposed that the ABU obtain a shadow rating from a credit rating agency for the purposes of this exercise, and nor was it Chevron practice to obtain credit ratings for subsidiaries with no external role.

17    I was also aware that there were Australian tax rules which effectively limited the amount of debt which could be borrowed. I communicated with Mr David Lewis (ABU tax) in relation to this issue.

Advice from GS and DB

…

20    … I recall that both GS and DB informed me that based on their analysis, the maximum amount of debt that the ABU could borrow if assigned a BBB credit rating would be less than US$2 billion. I told Mr Sheppard of these preliminary conclusions.

21    I recall later being told by Mr Sheppard that Treasury considered that the ABU could comfortably service debt of at least US$2.5 billion and that I should ask GS and DB to consider the maximum amount of debt that the ABU would be able to borrow if it had a lower credit rating. I did not specify which lower credit rating and nor did I specify the amount to be borrowed. Both matters were open for consideration. Those matters were discussed with GS and DB in our regular telephone conferences.

22    …

23    At around the same time (late November 2002), a representative of GS provided me with the conclusions GS had reached in relation to the amount that could be borrowed by the ABU if it were assigned a lower credit rating of BB, as well as the interest rate at which that amount could be borrowed. The amount was a maximum of US$2.5 billion and the interest rate was AUD LIBOR BBA plus 4.14%. I provided those figures to Mr Sheppard, and he told me he would pass them on to Chevron employees in Australia.

24    …

25    As explained above in paragraph 10, the proposal was that CFC would borrow in US dollars in the commercial paper market and lend to the ABU in Australian dollars. It followed that CFC would bear foreign currency exchange risk. As I understood the proposal, CFC would not enter into hedging arrangements to deal with the foreign currency exchange risk. Although I cannot now recall the details, to the best of my recollection the reason for this was certain restrictions imposed by the US Securities and Exchange Commission.

26    I understood that the spread between the interest rate at which CFC would borrow in the public debt markets and the rate at which it would loan the funds to the ABU could give rise to a profit in CFC. However, that profit would be affected by any movement in the exchange rate between the US dollar and the Australian dollar.

27    I also understood that the pricing exercise undertaken by GS and DB took into account the fact that CFC bore the exchange risk on the proposed loan to the ABU.

14    Importantly, in the final paragraph of her affidavit, Ms Taherian deposes:

I was not involved in making any decision about the amount that the ABU borrowed or the interest rate applicable to that borrowing. Nor was I involved in implementing the loan made by CFC to the ABU.

15    In the face of this admission, it is difficult to understand the lengths the Commissioner’s senior counsel went to in his submissions to persuade the Court that the applicant should not have leave for Ms Taherian to give her testimony by video link.

16    To fully understand my difficulty, one requires an appreciation of the central issue in this case. It is shortly stated in the Commissioner’s Outline of Submissions to be relied on in the substantive hearing at [6]:

Ultimately, the leveraging of CAHPL’s capital structure resulted in an advance of US$2.45 billion from its wholly owned subsidiary Chevron Funding Corporation (CFC) with an obligation to repay the A$ equivalent together with interest at a margin of 4.14% over the AUD LIBOR (totalling about 9%). It is the interest, at this rate, on the “significant additional debt” of US$2.45 billion or its A$ equivalent, which is the subject of dispute in this case.

(Emphasis added.)

THE COMMISSIONER’S SUBMISSIONS

17    The Commissioner, through his senior counsel, made various and diverse submissions as to why I should not accede to the applicant’s application for Ms Taherian to give her testimony by video link.

18    It was said that she is the only person from Chevron Treasury who is being called. That may be so, but she was not involved in the decision-making process on the key elements of the transaction the subject of the dispute.

19    When I put to Mr De Wijn QC that the Commissioner had, within four weeks of the hearing scheduled for last year, consented to both Ms Taherian and Mr Lees (also from Chevron Treasury) giving their evidence by video link, he responded: “A lot of water has passed under the bridge since …”. He did not elaborate.

20    Mr De Wijn QC then sought to explain to me why Ms Taherian’s evidence is now so critical. He did so by reference to what he called “the scheme” – the steps by which CAHPL’s debt was restructured through CFC; that the commercial paper funding was actually required to fund Chevron commitments in the US and the intersection with the Australian side of Chevron through CFC was tax driven. That may be so, but the transactional elements of “the scheme” are common ground; they are not in dispute; it is the size and pricing of the funding that are the issues in dispute and Ms Taherian’s evidence is that she was not involved in that decision-making process.

21    Mr De Wijn QC submitted (at T10/23–24):

There are probably at this stage at least a hundred pages of documents which I would want to put to her, which go to establishing the nature of what I might call the hypothetical twins and the policies and practices of Chevron, and realistically, that’s going to be very difficult to do by video link. So that’s the first part of the evidence that’s critical, which is what I might call the hypothetical twin aspect to the case: establishing the policies and practices of Chevron.

And to put it bluntly, the fact that Chevron would never have permitted a subsidiary like CAHPL to go out to the market independently and borrow 2.5 billion at LIBOR plus 4.14 per cent when it could borrow at below LIBOR.

22    In view of the fact that Ms Taherian had nothing to do with the decision to lend to CAHPL, the amount of the loan or its pricing, I am unable to conceive how the Commissioner would have 100 pages of documents to put to her in cross-examination.

23    Mr De Wijn QC then submitted that the second element in which Ms Taherian’s evidence is critical is that the Commissioner challenges her evidence about the development of the proposal by Chevron (at T10/44–46):

She gives evidence about the development of loan or the CFC CAHPL part of the transaction and we challenge that …

So What? She was not involved in the actual transaction and it is only the actual transaction vis-À-vis the Commissioner’s “hypothetical twin” that is in dispute. Ms Taherian’s evidence on the “development” of the loan (assuming that to be an accurate description) is not in issue and is not centrally relevant evidence.

24    It was submitted that Ms Taherian must have known what the purpose of the fundraising was: the cash raised stayed in the US, was transferred to an account in the name of CAHPL in the US in US dollars and then sent back to Chevron to be used to pay a dividend and pay off external debt. The actual movement of the cash is common ground and Ms Taherian’s view of the fundraising is irrelevant to the central issue in dispute.

25    It was then submitted that there are about 80 banking transactions in the US and that Ms Taherian will have to be taken through the bank statements relating to these transactions because she is now the only person from Treasury to cross-examine about them. But they are not in dispute; no cross-examination is necessary.

26    Mr De Wijn QC then submitted that Ms Taherian’s evidence raised questions of credit. He put it thus (at T16/17–29):

She says she’s the one that gave instructions to Goldman Sachs. That’s a clear question of credit – and the other questions of credit, I’m sorry to say – that will be put to her (a) in respect of matters in her affidavit that are factually incorrect, we say. She might say, “I forgot …” But we will put it to her that they’re factually incorrect. And they’re incorrect based upon documents she exhibits to her own affidavit. So, unfortunately, your Honour, credit is in issue in this case. But the second important matter that we will put Ms Taherian, which is also a credit issue, is that she doesn’t tell the full story. Now, she might say, “Well, someone prepared an affidavit and I signed it.” Well, so be it. But the – well, I’m not – I don’t know what she will say. But we will need to find out. But the fact is that she doesn’t put the full story. There are additional emails, which indicate that she’s – she’s fully aware of the arbitrage – the tax uplift.

27    Coming from senior counsel, I accept that this is a serious submission; otherwise, I would not. Ms Taherian’s instructions to Goldman Sachs are not centrally relevant. It is what was actually done and she was not involved in the decision-making process. As to the suggestion that she does not tell the full story, by her own admission she was not involved in the full story; and she was not involved in the important chapter of the full story. If the implication is that she did not admit her awareness of the tax uplift or arbitrage in “the scheme” for the Australia side of the Chevron Group that, with respect, is not relevant, let alone critically relevant, to the issue in dispute.

28    None of the Commissioner’s submissions, either alone or together, persuade me that I should require Ms Taherian’s testimony to be given in person. It is not centrally relevant to the issue in dispute; at best it is tangential.

CONCLUSION

29    The matters outlined in Mr Clough’s affidavit persuade me that I should accede to the applicant’s application so far as Ms Taherian is concerned.

Associate:

Dated:    18 September 2014