Federal Court of Australia
Mylan Australia Holding Pty Ltd v Commissioner of Taxation [2023] FCA 672
ORDERS
VID 526 of 2022 | ||
MYLAN AUSTRALIA HOLDING PTY LTD Applicant | ||
AND: | Respondent | |
DATE OF ORDER: |
THE COURT ORDERS THAT:
1. By 14 July 2023, the Applicant take all reasonable steps available to it to obtain the documents, or copies thereof, which fall within the categories set out in Schedule 1, which are in the power, custody or control of Viatris Inc and/or Mylan Inc and/or Mylan Laboratories Inc.
2. Pursuant to r 20.15(1) of the Federal Court Rules 2011 (Cth), the Applicant give non-standard discovery of the categories of documents in Schedule 1 by 28 July 2023.
3. By 28 July 2023, the Applicant file and serve an affidavit as to the Applicant’s efforts made pursuant to order 1 and the nature of the searches made to locate documents responsive to the categories of documents in Schedule 1.
4. Costs in the cause.
SCHEDULE 1
Definitions:
Mylan Group has the meaning given to it in paragraph 1(a) of the Applicant’s Appeal Statement.
Merck Generics business has the meaning given to it in paragraph 1(b) of the Applicant’s Appeal Statement.
Pre-Acquisition Period means the period 29 January 2007 to 2 October 2007.
Category 1
Modelling referred to in the email from Joe Vitullo of PwC US to Tim Hogan-Doran dated 2 October 2008.
The PwC Memorandum “80/20 Company Analysis for Mylan International Holdings Inc.” 30 September 2007 (MUS.001.032.9643) (being the document referred to at footnote 30 of the Applicant’s response to the Commissioner’s Request for Information dated 3 April 2020).
Category 2
All documents created during the Pre-Acquisition Period recording or evidencing any consideration given by any member of the Mylan Group to the capacity of any Australian subsidiary of the Mylan Group (including any Australian subsidiary of the Mylan Group yet to be incorporated or acquired) to service debt in connection with the acquisition of parts of the Merck Generics business.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
BUTTON J:
Background
1 The Respondent (the Commissioner) has applied for orders requiring the Applicant (MAHPL) to discover, and to take all reasonable steps available to it to obtain, documents in the relevant categories. Initially the Commissioner sought six categories of documents, but only pressed the application in relation to categories 3, 4 and 6 of his application.
2 By two proceedings, MAHPL appeals against objection decisions made by the Commissioner disallowing objections against certain assessments issued for the years ended 31 December 2009 to 31 December 2020 (the Assessments). The Assessments denied deductions for interest costs incurred by MAHPL’s subsidiary, Mylan Australia Pty Ltd (MAPL), on a promissory note referred to as “PN A2”, issued by MAPL to another Mylan Group entity, Mylan Luxembourg 1 S.a.r.l (Lux 1) and on a subsequent promissory note referred to as “PN A4”, issued by MAPL. PN A4 is not relevant to the issues that arise on the present application.
3 PN A2 formed part of the financing by which MAPL acquired the shares in Alphapharm Pty Ltd (Alphapharm) on 2 October 2007. That acquisition was part of the broader acquisition of the “Merck” worldwide generic pharmaceutical group by Mylan Inc (Mylan), then the ultimate parent of MAHPL. MAHPL is the head of the tax consolidated group formed under Pt 3-90 of the Income Tax Assessment Act 1997 (Cth).
4 The principal of PN A2 was set at 75% of the value of Alphapharm, subsequently fixed at AUD923,205,336. The interest rate was originally floating, but at some point it was fixed at 10.15% per annum with retroactive effect from 2 October 2007. The evidence in the proceeding includes a journal entry made in early October 2008 giving effect to this fixed interest rate retroactively.
5 The Assessments issued by the Commissioner disallowed interest deductions in reliance on determinations made under Pt IVA of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act). The Commissioner previously also relied, but no longer relies, on transfer pricing provisions to support the Assessments.
6 On 31 May 2023, the two proceedings were fixed for trial on 9 October 2023 on an estimate of 10 days. The matter was fixed for trial shortly after a case management hearing was held on 5 May 2023, at which the date of 9 October 2023 was discussed. At the time of that hearing, the Commissioner had foreshadowed (but had not yet made) the present discovery application. The Commissioner did not submit that the matter should not be fixed for trial on 9 October 2023 due to the foreshadowed discovery application. Nor did the Commissioner press the present application, which was made on 25 May 2025, on the basis that the trial ought to be vacated if that was necessary to enable its discovery request to be met.
7 It is necessary to say something briefly about the procedural chronology, given the lateness of the present application relative to the forthcoming trial, and having regard to the extensive period over which the Commissioner has been able to obtain documents, either by exercising his statutory powers, or by making requests for information (RFIs), as part of the investigation, audit and objection periods which preceded the issuing of the Assessments.
8 The Commissioner’s investigation commenced in November 2009 and progressed to an audit in early August 2012. The Commissioner made at least 18 requests for information, and over 1,500 documents were produced. The Court was taken to some requests, and the responses to those requests, in the course of argument.
9 The Assessments were issued on 27 April 2021 for the 2009 to 2019 tax years (the 2009–2019 Assessments). Another Assessment, for the 2020 tax year, was issued on 28 February 2022 (the 2020 Assessment).
10 MAHPL lodged notices of objection on 4 June 2021, in respect of the 2009–2019 Assessments, and on 6 April 2022, in respect of the 2020 Assessment.
11 On 14 October 2021, MAHPL issued notices, in relation to the 2009–2019 Assessments, under s 14ZYA of the Taxation Administration Act 1953 (Cth) (TAA), the effect of which was relevantly to compel the Commissioner to determine the objections within 60 days, with a decision disallowing the objection deemed to have been made if no decision has been made within 60 days. MAHPL issued a further s 14ZYA notice in relation to the 2020 Assessment on 8 June 2022.
12 The Commissioner made a decision disallowing the objections to the 2009–2019 Assessments on 13 December 2021, just over six months after the objections were lodged on 4 June 2021. The Commissioner made a further decision disallowing the objection to the 2020 Assessment on 28 July 2022. The two decisions are in substantially identical terms and are treated in these reasons as one objection decision.
13 The Commissioner’s objection decision identified, as the primary scheme for the purposes of the application of Pt IVA, a scheme involving the incorporation of the two Australian subsidiaries, MAHPL and MAPL. The Commissioner’s primary counterfactual involved Alphapharm becoming a part of the Mylan Group without any Australian subsidiaries being incorporated, but by the acquisition of Alphapharm’s parent company, Merck Generics Group B.V. (MGG BV). The Commissioner’s objection decision also identified two alternate schemes, and two alternate counterfactuals, both allowing for the incorporation of the Australian subsidiaries, but providing for a lower gearing ratio, in other words, more equity and less debt. In respect of one of the alternate counterfactuals, the Commissioner posited the intra-group borrowing (ie PN A2) being replaced with external debt funding, and in the other, by intra-group borrowings, but for a lesser amount, and on different terms.
14 The Commissioner’s objection decision referred to two counterfactuals put forward by MAHPL during the audit. The two further counterfactuals developed by the Commissioner were said (in the objection decision) to draw on the counterfactuals identified by MAHPL and to have been identified by the Commissioner in reviewing the audit decision and in considering MAHPL’s contentions in respect of Pt IVA.
15 The principal proceeding was then commenced on 22 December 2021, with a further proceeding commenced (in respect of the 2020 Assessment), on 13 September 2022.
16 The Commissioner’s Appeal Statement in the principal proceeding was filed on 14 February 2022 and MAHPL’s Appeal Statement was filed on 28 February 2022. The secondary and tertiary schemes and counterfactuals set out in the Commissioner’s Appeal Statement accorded with the alternatives identified and set out in the objection decision in December 2021.
17 While the Commissioner amended his Appeal Statement in May 2023 to remove reliance on transfer pricing provisions, it is otherwise unchanged since it was filed.
18 MAHPL’s lay evidence comprises two affidavits. The first is an affidavit of Paul Campbell dated 4 August 2022. Mr Campbell is the Senior Vice President, Controller and Chief Accounting Officer at Viatris Inc, MAHPL’s current ultimate parent company. Mr Campbell’s affidavit largely exhibits valuation documents, including drafts, prepared by PwC and which go back to 24 August 2007. A complete draft valuation was issued on 30 May 2008 and the final valuation was issued on 9 February 2009.
19 The second lay affidavit is an affidavit of Thomas Salus, Deputy Global General Counsel of Mylan and Assistant Secretary of Viatris Inc. Mr Salus’s affidavit says nothing of substance, but exhibits 205 documents as forming “part of the records belonging to and maintained by Viatris and its related entities”. The Commissioner relies on the fact that many documents exhibited by Mr Salus are, on their face, documents of Mylan (then the relevant parent entity) as distinct from being documents of the Australian subsidiaries. The Commissioner contrasted the production, by MAHPL in its lay evidence, of documents of the then-parent company, with the responses given to various of the Commissioner’s document and information requests, which carefully (as the Commissioner sees it) did not produce parent company documents in answer to queries directed to the Australian subsidiaries.
20 Given the limited ambit of the lay affidavits, it appears clear that the trial will be contested on the documentary record and on the expert evidence.
21 MAHPL filed an affidavit of Kevin Glenn, a US tax attorney, dated 2 August 2022, which annexed Mr Glenn’s expert report (Glenn I). The expert retained by the Commissioner, Harry Rosenbloom, prepared a responsive report, annexed to an affidavit dated 29 November 2022 (Rosenbloom). Mr Glenn prepared a reply report, dated 10 April 2023 (Glenn II). This body of expert evidence addressed the US tax consequences of the transaction as it occurred, as well as the relative tax position of the counterfactual transactions.
22 MAHPL also filed expert reports of Terence Stack dated 5 August 2022 (Stack I), and Mozammel Ali dated 10 August 2022 (Ali I).
23 The Commissioner filed a report of David Bernard responding to Stack I and parts of Ali I dated 8 December 2022 (Bernard I) and a report of Gregory Johnson dated 15 February 2023 responding to parts of Stack I and Ali I (Johnson I).
24 MAHPL filed reply reports of Mr Stack (Stack II) and Mr Ali (Ali II), both dated 11 April 2023.
25 On the present application, the parties relied on affidavits of their solicitors, which largely concerned the chronology above, and the details of the information and documents sought by the Commissioner, and the responses the Commissioner received to those requests.
26 MAHPL also put on evidence of Daniel Slater, a special counsel at MinterEllison, MAHPL’s solicitors, stating that, if orders were made in the terms sought by the Commissioner (which then comprised six categories), the resultant discovery exercise would cost “many hundreds of thousands of dollars”, and would take at least 90 days to complete. Mr Slater also stated that the “Mylan Group” (as that term is used in some proposed categories) comprised 22 entities from 29 January 2007 to 2 October 2007, and an additional 38 entities from 2 October 2007 to 31 December 2007.
27 The Commissioner gave notice that he was pressing his application only in respect of three of the six categories on the weekend before the hearing, and (not surprisingly) there was no evidence regarding how much time or cost would be saved by the narrowing of the application. There was no application to cross-examine Mr Slater on his time and cost estimates.
Legal Principles
Discovery in tax cases
28 In this Court, there is no discovery as of right; discovery is only to be given where an order is made: Federal Court Rules 2011 (Cth) r 20.12(1). No application for discovery should be made unless it will facilitate the just resolution of the proceeding as quickly, inexpensively and efficiently as possible: r 20.11.
29 The Court’s Taxation Practice Note (TAX-1), issued on 20 December 2019, provides as follows regarding discovery:
Discovery
7.1 Generally speaking, in tax appeals, where the taxpayer has the burden of proof and the parties can be assumed to have the relevant facts and information arising from an audit or assessment process, parties should assume that discovery will not be necessary or that only limited discovery will be permitted and managed in a targeted manner.
30 Mindful of the usually limited scope for discovery in tax cases, the Commissioner submitted that:
Discovery may be warranted in a Part IVC appeal if the material on which the taxpayer sought to conduct the appeal was selective and material had been hidden from the Commissioner [citing Hydrocarbon Products Pty Ltd v Commissioner of Taxation (1986) 18 ATR 139 at 144.6 per Tadgell J]. The fact that the Commissioner had the opportunity to inspect and obtain documents during the course of an audit does not conclude the issue of discovery against the Commissioner [citing Eastern Nitrogen Ltd v Commissioner of Taxation (1996) 33 ATR 4 at 6.5 per Spender J]. What might have been thought to be relevant during an audit is not necessarily what might be thought to be relevant to a party who is now a litigant to proceedings in the Court [citing Eastern Nitrogen Ltd v Commissioner of Taxation (1996) 33 ATR 4 at 6.6 per Spender J].
Part IVA
31 In view of MAHPL’s submission that each of the three categories of discovery sought by the Commissioner was irrelevant as each category seeks documents going to subjective aspects of the transaction, it is necessary to say something brief about Pt IVA.
32 Section 177D(1) of the 1936 Act provides that Pt IVA applies to a scheme “if it would be concluded (having regard to the matters in subsection (2)) that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of” (relevantly) enabling one or more taxpayers “to obtain a tax benefit in connection with the scheme”. Section 177D(2) then sets out eight matters to which regard is to be had in determining whether the requisite purpose existed. One of those matters is the “manner in which the scheme was entered into or carried out”: s 177D(2)(a).
33 It is well established that s 177D(1) is not concerned with any person’s subjective purposes or motivations; the enquiry is objective: Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 at 421–22 (Brennan CJ, Dawson, Toohey, Gaudron, Gummow and Kirby JJ); Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359 at 382 (Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ). The question is whether a reasonable person would reach the necessary conclusion about entry into the scheme.
34 The Commissioner drew attention to Federal Commissioner of Taxation v News Australia Holdings Pty Ltd (2010) 79 ATR 461; [2010] FCAFC 78, in which the Full Court (Stone, Jessup and Jagot JJ) said as follows regarding the sometimes subtle distinction between objective and subjective purpose and the fact that subjective intention may be reflected in objective evidence (at [28] and [30]):
[28] It may be acknowledged that the “difference between the actual purpose of a taxpayer, on the one hand, and the purpose which is to be imputed to the taxpayer based upon an exclusive set of criteria, on the other hand, is not without subtlety and has been misunderstood before”: FCT v Zoffanies Pty Ltd (2003) 132 FCR 523 at 545 [91]; 54 ATR 280 at 301 [91]; 2003 ATC 4942 at 4960 [91]. But this is not a case where the Tribunal correctly identified the relevant legal principle but then failed to apply it. As the Commissioner acknowledged, the Tribunal asked itself the correct question (at ATR 985 [67](c); ATC 3117 [67](c)). Moreover, when the Tribunal came to answer that question, all of its subsidiary and ultimate findings and conclusions, were also directed to that question. This is apparent from both the structure and the content of the Tribunal’s reasons.
…
[30] The Commissioner’s submissions fail to distinguish between objective and subjective intention. Section 177D(b) of the [1936 Act] requires a conclusion about a person’s objective intention or purpose. That intention must be objectively ascertained by a consideration of the factors listed in s 177D(b) of the [1936 Act]. It is, however, hardly surprising if objective intention in fact accords with the person’s subjective intention. If subjective intention is reflected in objective evidence, no error is made by taking that evidence into account albeit that it is consistent with the person’s subjective intention. The Tribunal recognised this distinction when it rejected subjective intention as irrelevant while at the same time recognising that the “no tax, no tax risk” policy of News Group was a significant matter “which must be addressed”.
35 In argument, counsel for MAHPL accepted that there is room for argument regarding where the line is to be drawn between subjective and objective matters in Pt IVA cases.
The discovery application
36 The Commissioner’s interlocutory application sought orders in the following terms (and costs):
1. By [date], the Applicant take all reasonable steps available to it to obtain the documents, or copies thereof, which fall within the categories set out in Schedule 1, which are in the power, custody or control of Viatris Inc and/or Mylan Inc and/or Mylan Laboratories Inc.
2. Pursuant to rule 20.15(1) of the Federal Court Rules 2011 (Cth), the Applicant give non-standard discovery of the categories of documents in Schedule 1 by [date 2 weeks after date in 1].
3. By [date 2 weeks after the date in 1], the Applicant, by a director having knowledge of the facts, is to file and serve an affidavit as to the Applicant’s efforts made pursuant to order 1 and whether, to their knowledge, the request made of Viatris Inc has been complied in whole, in part, or not at all
4. Costs.
37 The Commissioner applied for discovery of three categories of documents, framed in the following terms:
Category 3
All documents created during the Relevant Period [29 January 2007 to 31 December 2007] containing US or Australian tax modelling or analysis of US or Australian tax consequences of the Mylan Group’s anticipated acquisition of the Merck Generics business, which for the avoidance of doubt includes modelling or analysis of acquisition structures or financing arrangements not adopted by the Mylan Group and modelling or analysis of the availability of foreign tax credits.
Category 4
All documents created during the Pre-Acquisition Period [29 January 2007 to 2 October 2007] recording or evidencing any consideration given by any member of the Mylan Group to the debt servicing capacity of any Australian subsidiary of the Mylan Group (including any Australian subsidiary of the Mylan Group yet to be incorporated or acquired).
Category 6
All documents created between 2 October 2007 to 8 July 2009 relating to the setting of the interest rate of PN A2.
38 The term “Mylan Group” was defined by reference to paragraph 1(a) of MAHPL’s Appeal Statement, being Mylan and its subsidiaries.
Category 3
39 Category 3 is as follows:
All documents created during the Relevant Period [29 January 2007 to 31 December 2007] containing US or Australian tax modelling or analysis of US or Australian tax consequences of the Mylan Group’s anticipated acquisition of the Merck Generics business, which for the avoidance of doubt includes modelling or analysis of acquisition structures or financing arrangements not adopted by the Mylan Group and modelling or analysis of the availability of foreign tax credits.
Submissions
40 The Commissioner sought the category 3 documents “to test whether Mylan Inc did in fact expect to be in an OFL [Overall Foreign Loss] position and the materiality of that risk”. Mr Glenn’s opinion was that at the time of the acquisition, Mylan was in OFL and its OFL account would reasonably be expected to grow. As explained at a high level by the Commissioner’s counsel, and Mr Glenn and Prof Rosenbloom’s reports, when a US taxpayer’s deductions and allocations apportioned to foreign source income are greater than its foreign source gross income, that taxpayer is in OFL. Being in OFL limits the ability of the US taxpayer to claim foreign tax credits. When the taxpayer is no longer in OFL, recapture rules apply to recharacterise what would otherwise be foreign source income as US source income. Mr Glenn’s opinion was that there was no reason to believe that Mylan would be capable of generating positive foreign source taxable income (which would bring it out of OFL), in light of its US interest expense and R&D deductions.
41 The Commissioner pointed to the engagement between Mr Glenn and Prof Rosenbloom on the issue of how US tax laws may have applied, and Prof Rosenbloom’s view that US tax consequences of the Australian investment could not be looked at in isolation from the effects of the performance of other overseas subsidiaries, as they too affect the tax position in the US. The Commissioner anticipated that modelling of tax consequences would have addressed the anticipated worldwide picture and “would reveal whether Mylan Inc could expect to use its foreign tax credits generated by the payment of Australian tax to shelter its worldwide foreign income (including from its subsidiaries in jurisdictions such as Puerto Rico, Luxembourg and Bermuda which might not have generated a significant amount of foreign tax credits)”.
42 The Commissioner also submitted that, not only is there a basis to infer the existence of tax modelling (including a PwC email of 2 October 2008 referring to a “financial model which we modified continuously … to evaluate the US tax effectiveness …”), but the Commissioner had earlier sought the tax modelling, and MAHPL had resisted producing it. The documents to which the Court was taken show that:
(a) The Commissioner requested the modelling referred to in the PwC email in a statutory notice issued to MAHPL in September 2016 pursuant to s 353-10 of Sch 1 of the TAA. The email to which the Commissioner referred was sent by a person in PwC’s Pittsburgh International Tax Office. MAHPL’s response was that:
No documents relevant to question 15 of Schedule B have been identified in the custody or under the control of MAHPL, MAPL or Alphapharm. We note that a duplicate information request pursuant to section 264A of the Income Tax Assessment Act 1936 has been received by MAHPL.
The Commissioner also requested the modelling in a statutory notice issued to MAHPL pursuant to s 264A of the 1936 Act, which was also sent in September 2016. MAHPL’s answer to that request was that no responsive documents had been identified.
(b) In April 2020, the Commissioner issued an RFI, which asked:
13. In the period 1 January 2007 to 31 December 2007, was any U.S. tax modelling performed that projected Net Operating Losses under the U.S. Internal Revenue Code for the income or tax years following the acquisition of the generic pharmaceutical business of Merck KGaA[?]
The response (issued by MAHPL) stated (emphasis added):
32. US tax considerations were crucial to the acquisition structure set up by Mylan Inc. in advance of the transaction close and implemented at the time of the close on 2 October 2007.
33. For the purpose of its representations to the 3 October 2007 Investor Day, Mylan Inc. adopted modelling assumptions in its projections that it would have a combined effective tax rate of 34–36%, exclusive of incremental tax planning benefits estimated to account for approximately US$70 million per annum by CY 2010.
34. To the extent that PwC performed US tax modelling, it has not been possible to identify a copy of that model that was relied upon by Mylan Inc. Accordingly, it follows that no tax modelling projecting Net Operating Losses [u]nder the US Internal Revenue Code has been identified.
A footnote to paragraph 32 in this response stated: “See for example PwC Memorandum “80/20 Company Analysis for Mylan International Holdings Inc.” 30 September 2007 (MUS.001.032.9643)”.
(c) The Commissioner then sought the document referred to in that footnote by email and again issued a further RFI in October 2020, but the response was as follows (emphasis added):
This is a Mylan Inc. document referred to by way of example only and MAHPL does not rely on it. There is ample other material already in the ATO’s possession that demonstrate that U.S. tax considerations were crucial to the acquisition structure set up by Mylan Inc. in advance of the transaction close and implemented at the time of the close on 2 October 2007 including the step plans produced by PwC setting out the transaction steps and structure.
43 In addressing the delay in making an application seeking tax modelling when the existence of modelling was clearly on his radar from a very early stage, the Commissioner accepted that there had been some delay, but argued that it was reasonable for him to wait to see whether the modelling emerged in MAHPL’s evidence. The Commissioner also contended that there was no particular detriment to MAHPL in respect of his discovery application seeking the tax modelling having been delayed.
44 MAHPL made the following submissions in resisting category 3:
(a) it contended that modelling is an inherently subjective exercise and is irrelevant to the application of Pt IVA;
(b) the request overlaps heavily with previous information requests and statutory notices;
(c) the Court has before it “step plans” prepared by Mylan’s advisors, all of which contemplated debt and equity funding to acquire Alphapharm in broadly the same proportions as the external funding obtained by other group entities;
(d) the existence and expectation of an OFL is an objective fact, which was raised by its Appeal Statement in February 2022, and in Glenn I in August 2022 based on documentary evidence, including Mylan’s tax returns and Mr Glenn opining (inter alia) that, at the time of the acquisition, Mylan’s OFL account and its continued growth would reasonably be expected; and
(e) the existence and expectation of an OFL were not challenged by the Commissioner in his Appeal Statement or in Prof Rosenbloom’s report, and the Commissioner ought not be permitted to “fish” for a basis to challenge it now.
Consideration
45 Contrary to MAHPL’s submission, I do not accept that the modelling of tax consequences is irrelevant on the basis that it constitutes subjective evidence. Arguments may yet ensue at trial regarding the relevance of some evidence, having regard to the subjective/objective boundary referred to above. Accordingly, it is not appropriate to say more at this point than that I am not prepared to conclude that tax modelling of the kind sought would necessarily be irrelevant on the basis contended for. On the contrary, the existence and results of tax modelling may well go to the manner in which a scheme was entered into or carried out, as the existence and results of a model may themselves constitute objective facts (being pieces of information in existence at the time).
46 I also do not accept that the existence of step plans, which MAHPL pointed to in relation to the gearing ratio point, render tax modelling of the kind sought surplusage. It was not suggested that the step plans detail expectations regarding the OFL.
47 Further, while MAHPL is correct that the tax modelling request is duplicative of requests made by the Commissioner through the investigation and audit, that point carries little weight given the responses that the Commissioner received to his enquiries, which were directed to MAHPL.
48 All of that said, the request is very broad in its terms as it seeks all documents over almost a full year that contain tax modelling or analysis of the US or Australian tax consequences of the entire acquisition, including modelling or analysis of acquisition structures or financing arrangements not adopted and modelling or analysis of the availability of foreign tax credits.
49 I also take into account that the matter of the expected OFL is not a new issue. In his objection decision (in December 2021), the Commissioner concluded that MAHPL had been unable to “substantiate that you reasonably believed (based on projections made at or around the time the transaction was entered into and strategies that may have been available to [you] at the time) that the Mylan Group would be in an overall foreign loss position for the next ten years and therefore would not be able to utilise foreign tax credits”. The OFL and foreign tax credits issues were also referred to by the Commissioner in his Statement of Audit Position in April 2021. The OFL expectation was also raised by MAHPL’s Appeal Statement in February 2022 and addressed extensively by Mr Glenn.
50 The Commissioner’s delay may not be of much significance if he were seeking specific identified modelling, or if the category was narrowed by reference to specific custodians. While I do not have specific evidence on the searches required to address each category, I accept that answering the category as it is drafted would require substantial efforts to be undertaken to locate and review potentially relevant documents from a period many years ago, without any parameters (eg, in relation to custodians) that would usefully limit the document collection and searching effort. While this is a “big” proceeding (with over $200 million in tax and interest in issue), the trial is now under four months away and I do not consider it reasonable that MAHPL’s resources should be diverted to return to a wide-ranging discovery exercise in respect of an issue that has long been “on the table” and of which the Commissioner was well aware.
51 However, I do consider it reasonable that MAHPL should discover, and take reasonable steps to obtain, the modelling referred to by PwC in the email of 2 October 2008, and the document referred to in the footnote referred to above (ie the PwC Memorandum “80/20 Company Analysis for Mylan International Holdings Inc.” 30 September 2007 (MUS.001.032.9643)).
Category 4
52 Category 4 is as follows:
All documents created during the Pre-Acquisition Period [29 January 2007 to 2 October 2007] recording or evidencing any consideration given by any member of the Mylan Group to the debt servicing capacity of any Australian subsidiary of the Mylan Group (including any Australian subsidiary of the Mylan Group yet to be incorporated or acquired).
Submissions
53 The Commissioner submitted that the issue of MAPL’s capacity to service the debt incurred by PN A2 emerged because two of the experts, Mr Stack and Mr Bernard, each opined that a reasonable gearing ratio for a subsidiary depends on that subsidiary’s capacity to service its debt. The Commissioner submitted that the documents sought were relevant to the manner in which the scheme was carried out as they would reveal whether anyone considered MAPL’s capacity to service debt and also on the basis that the documents would be relevant to what the gearing ratio should have been as the Commissioner’s second and third counterfactuals were based on a lower gearing ratio.
54 The Commissioner referred to documents received during the Commissioner’s audit having revealed indirect references to analysis having been done as to MAPL’s capacity to service local borrowings. The Commissioner pointed to an RFI made in August 2011 which requested financial forecasts prepared prior to the acquisition of Alphapharm along with any contemporaneous market research or other information supporting those forecasts. The response to that enquiry provided forecast figures said to have been extrapolated from an independent valuation report prepared by PwC US dated May 2008. These figures included EBIT, interest expenses and the calculated taxable profit/loss, with profits recorded in each year from 2007 to 2014 other than 2008. The point that the Commissioner made about the forecasts was that they post-dated the acquisition and so could not constitute the figures available prior to the acquisition.
55 Counsel for the Commissioner acknowledged that forecasts issued by KPMG had also been produced, and were pre-acquisition figures, but submitted that these figures also did not constitute the figures necessarily relied on by the purchaser as they were the seller’s projections.
56 In addition to making points about the contents of the expert reports of Mr Stack and Mr Bernard, MAHPL submitted that there is already objective evidence before the Court, including contemporaneous projections of expected cash flows, by which MAPL’s debt-servicing capacity can now be evaluated, and has been so evaluated by the experts. MAHPL also pointed to contemporaneous evidence that it was expected that the cash flows of the Mylan Group would be very tight in the first two to three years after the acquisition due to high gearing, so much so that it suspended the payment of dividends to public shareholders. MAHPL also referred to detailed cash flows prepared by Merrill Lynch, which were presented to the external financiers and ratings agencies in the pre-acquisition period. It submitted that the experts agreed that, based on the cash flow projections prior to the acquisition, income generated within the US would be insufficient to meet external debt-financing obligations and that Mylan would need cash from elsewhere which would be easier to obtain with debt, as compared with equity, and that it was clear that there would be a “cash sweep” from the subsidiaries. MAHPL also highlighted that projected gearing would be consistent across the group.
57 MAHPL contested that the PwC document referred to by the Commissioner constituted only post-acquisition cash flow analysis on the basis that a number of drafts of the PwC work had been presented going back into the pre-acquisition period in August 2007. The August 2007 draft states that it is presenting analyses based on information provided by Mylan management.
58 As with other categories, MAHPL characterised any analyses of debt-servicing capacity as recording only subjective expectations.
Consideration
59 The August 2007 PwC analysis to which the Court was directed does show purchaser-side cash flow estimates, including for Australia, in the pre-acquisition period. However, the August 2007 document presents figures on an unleveraged basis and does not record anticipated interest expenses. As such, while these cash flow figures, and other pre-acquisition cash flow figures (the sell-side KPMG figures) enable experts to calculate the Australian subsidiaries’ debt-servicing capacity, they do not reveal — one way or the other — whether there was a pre-acquisition analysis of the capacity of the Australian subsidiaries to service the debt proposed to be incurred to fund the Alphapharm acquisition.
60 I do not accept that evidence of any analysis of servicing capacity is irrelevant as merely expressing the subjective views of an individual. Whether or not there was analysis of the capacity of the Australian business to service anticipated debt may well go to the manner in which the scheme was entered into or carried out. The fact that MAHPL says it has answers to the contentions the Commissioner might make about gearing levels does not mean the evidence in question is irrelevant. Further, while the “step plans” of Mylan’s advisers, Deloitte and then PwC, also go to the manner in which the scheme was entered into or carried out, their availability does not preclude other evidence also going to the manner in which the scheme was carried out.
61 While MAHPL stresses, as part of its case, that the gearing at the Australian level was consistent with gearing at the group level, and (in a group context) it would not be expected that there would be a close focus on the short-term capacity of a subsidiary to service anticipated debt, the gearing ratio is an important part of the Commissioner’s case. Given that the documents to which the Court was referred do not show pre-acquisition analysis of debt-servicing capacity, unless the discovery sought is unduly burdensome, in my view the Commissioner should have the documents in question rather than having to rely on inferences about what the absence of evidence of analysis of debt-servicing capacity reveals (which inferences MAHPL has already stated in its submissions ought not be drawn).
62 The period referred to in category 4 is just over seven months (cf the longer period of the other categories). While the category refers to the “Mylan Group” and that group, in the period in question, comprised 22 entities, that does not necessarily mean that documents of each entity will need to be reviewed. In my view, given the document collection and review processes that have been undertaken to date, those on the Mylan side will have a reasonable idea of where any responsive documents are most likely to be located. Discovery involves a reasonable and proportionate search. A search of that kind can be supported by explicit and reasonable judgements made about the document repositories to be reviewed and the manner in which the review is to be undertaken.
63 Further, as it may be expected that responsive documents are most likely to be held by MAHPL’s parent (unless they have been put in its custody in Australia at an earlier point in time), the orders sought by the Commissioner will oblige MAHPL to take all reasonable steps to obtain documents which are in the power, custody or control of Viatris Inc, Mylan Inc and/or Mylan Laboratories Inc. MAHPL’s submissions were directed to the substance of the proposed categories; it did not make any submission to the effect that a Sabre order (Sabre Corporation Pty Ltd v Russ Kalvin’s Hair Care Company (1993) 46 FCR 428) ought not be made if I were otherwise satisfied that the category should be discovered.
64 As the issue of the gearing level is not a new issue, and the potential link between gearing and debt-servicing capacity is (with due respect to the experts) somewhat obvious, I do not accept the suggestion that the issue to which category 4 is directed is really a “new” issue that only emerged following the expert reports. Nevertheless, as I do not consider the discovery sought to be particularly burdensome (having regard to the matters I have referred to above), I do not consider the Commissioner’s delay to be fatal to the application.
Category 6
65 Category 6 is as follows:
All documents created between 2 October 2007 to 8 July 2009 relating to the setting of the interest rate of PN A2.
Submissions
66 The Commissioner emphasised that MAHPL’s Appeal Statement positively contends that, on or before 31 December 2007, the decision was made to (inter alia) amend PN A2 to establish a principal of AUD923,205,336 and to fix the interest rate at 10.15% with retroactive effect to 2 October 2007. The Commissioner submitted that when the fixing of the interest rate with retroactive effect occurred was a matter that was in dispute (notwithstanding that the Commissioner has not otherwise raised any dispute about the date on which the interest rate was fixed).
67 The Commissioner submitted that, having regard to responses given to a statutory notice issued in September 2016, there is a basis to infer that the production given in response to that notice was incomplete and that more complete production could be made if a Sabre order were made.
68 The 2016 notice was issued to MAHPL and relevantly requested two categories of documents:
5. All *correspondence with employees, officers, directors or *Advisors of *MAPL referring or relating to negotiating, determining the terms or conditions of, or entering into *PN A2.
…
8. All *correspondence with employees, officers, directors or *Advisors of *MAPL in connection with negotiating, determining or amending the principal amount, or other amount excluding interest, payable in respect of *Amended PN A2.
69 While the Court’s attention was directed to items 5 and 8 in the notice, item 7 requested equivalent documents in respect of the negotiation, determination or amendment of the interest rate for Amended PN A2 (see the below quotation at para 71).
70 The response to this written notice stated that:
(a) all of the documents identified in response to item 5 are privileged (with one exception);
(b) no documents relevant to item 7 had been identified in the custody or under the control of MAHPL, MAPL or Alphapharm; and
(c) all of the documents identified in response to item 8 are privileged.
71 The response to this notice included a narrative which stated that (emphasis added):
Mylan Group Treasury was responsible for determining appropriate fixed interest rates for all promissory notes based on the cost of external debt and an appropriate spread for the currency of the note. The fixed interest rate of 10.15% was determined and set by Mylan before 31 December 2007.
The principal of PNA2 was adopted on the basis of an external valuation completed by PwC. The external entity valuation provided by PwC in respect of Alphapharm was received in December 2007. The final principal of PNA2 was finalised on the basis of the PwC valuation dated 2 February 2009.
As at 31 December 2007, the terms of Amended PNA2 were materially settled in substance, and interest was accrued on that basis.
Amended PNA2 was drafted by Hall & Wilcox which was formally executed by Kristen Kolesar on 8 January 2010.
72 The response also identified (at item 11) the names and positions of the individuals involved in (inter alia) amending the interest rate on PN A2. Those individuals included Mylan Group personnel located in New York and Pittsburgh, as well as US-based PwC personnel. With the exception of Stephen Fraser (Finance Director), the only Australian-based individuals named were two lawyers at Hall & Wilcox.
73 MAHPL’s written submissions concerning category 6 were very brief, contending only that the category seeks documents about subjective matters and that there is already a great deal of evidence before the Court about the appropriate or arm’s length interest rate and the advantages of fixing the interest rate. During the hearing, counsel for MAHPL pointed to some additional matters:
(a) the request for documents did not extend to a request for documents from the parent entity in relation to interest rates;
(b) the terms of PN A2 always contemplated that an arms’ length interest rate would be set after the transaction;
(c) a journal entry made on 3 October 2008 applied the fixed interest rate retroactively;
(d) if the timing of when the interest rate was fixed was an issue, that matter had not been raised by the Commissioner and, if it was to be raised by the Commissioner as an issue now, MAHPL would put on a short affidavit to address it;
(e) MAHPL’s experts explained why it was sensible to have a fixed rate for an intercompany loan, and that a fixed and floating interest rate are economically equivalent at the time they are chosen because they are chosen by reference to the future curve and looking at where the market thinks interest rates will go; and
(f) the Commissioner’s expert evidence also addressed the economic equivalence point on the basis that the fixing of the interest rate was contractually effective and retrospective from the date of the promissory note.
74 In his reply submissions, counsel for the Commissioner noted that the Commissioner’s Appeal Statement identified that there was an amendment to PN A2 in 2010 and that the Commissioner was putting the taxpayer to proof on all facts. The Commissioner also submitted that, if matters that the terms of PN A2 required to be revisited within 90 days after the transaction were in fact left for some substantial period, that would bear on the manner in which the overall transaction was undertaken.
Consideration
75 I have concluded that no order for discovery should be made in respect of category 6. That is for the following reasons.
76 First, the documents sought by the September 2016 notice are not to the point. That notice specifically sought correspondence, etc, with MAPL personnel or its advisors; it did not seek Mylan Group-level documents. The Court was not taken to any follow-up notice or RFI seeking further documents, despite the response to the notice making it clear that almost all the persons said to be involved in fixing the interest rate were not Australian-based, and two of three Australian-based individuals were external lawyers.
77 Secondly, the trial is fixed for 9 October 2023, less than four months away. That is not a particularly long time in the scheme of a large and relatively complex case involving multiple experts. MAHPL stated in its Appeal Statement, as had been stated in the response to the September 2016 notice, that the decision to fix the interest rate was taken before the end of December 2007. Despite having the 2008 journal entry, and being aware from MAHPL’s lay evidence in August 2022 that MAHPL was not putting on lay evidence about when the interest rate was fixed, the Commissioner did not pursue the issue of the timing of when the interest rate was fixed.
78 Thirdly, the principal reason I understood the Commissioner to be seeking documents concerning the interest rate fixing was that the state of the markets and expectations concerning interest rates would be assessed at the time the interest rate was fixed. This matter goes to the appropriateness of the interest rate itself (ie whether 10.15% is excessive). It would introduce a substantial new front into the Pt IVA case to raise, at this late stage, the issue of whether the interest rate fixed was excessive. Introducing that issue into the Pt IVA case may also require further expert reports. If the Commissioner wanted to explore the timing of the interest-rate fixing as part of his Pt IVA case, he had ample opportunity to do so, but the time for that has passed.
79 Fourthly, while the other use that may be made of the documents sought — namely as going to how the scheme was implemented by potentially pointing to delay — is a distinct use of documents that may be discovered, ordering discovery has the real potential to open a substantial new front at too late a stage. That is so particularly where the Commissioner already has MAHPL’s positive contention that the decision was made before the end of December 2007, set against the fact that journal entries for the fixed interest rate were not made until October 2008, and the note itself was not amended until 2010. In other words, the Commissioner is not left empty-handed without discovery on this point.
Conclusion
80 For the foregoing reasons, I will order that:
1. By 14 July 2023, the Applicant take all reasonable steps available to it to obtain the documents, or copies thereof, which fall within the categories set out in Schedule 1, which are in the power, custody or control of Viatris Inc and/or Mylan Inc and/or Mylan Laboratories Inc.
2. Pursuant to r 20.15(1) of the Federal Court Rules 2011 (Cth), the Applicant give non-standard discovery of the categories of documents in Schedule 1 by 28 July 2023.
3. By 28 July 2023, the Applicant file and serve an affidavit as to the Applicant’s efforts made pursuant to order 1 and the nature of the searches made to locate documents responsive to the categories of documents in Schedule 1.
4. Costs in the cause.
81 The Schedule will be in the following terms:
Definitions:
Mylan Group has the meaning given to it by paragraph 1(a) of the Applicant’s Appeal Statement.
Merck Generics business has the meaning given to it in paragraph 1(b) of the Applicant’s Appeal Statement.
Pre-Acquisition Period means the period 29 January 2007 to 2 October 2007.
Category 1
• Modelling referred to in the email from Joe Vitullo of PwC US to Tim Hogan-Doran dated 2 October 2008.
• The PwC Memorandum “80/20 Company Analysis for Mylan International Holdings Inc.” 30 September 2007 (MUS.001.032.9643) (being the document referred to at footnote 30 of the Applicant’s response to the Commissioner’s Request for Information dated 3 April 2020).
Category 2
All documents created during the Pre-Acquisition Period recording or evidencing any consideration given by any member of the Mylan Group to the capacity of any Australian subsidiary of the Mylan Group (including any Australian subsidiary of the Mylan Group yet to be incorporated or acquired) to service debt in connection with the acquisition of parts of the Merck Generics business.
82 In finalising category 2, I have made some slight modifications from the terms in which category 4 was drafted.
83 I have not directed that the affidavit be made by a director. It may be made by MAHPL’s solicitors, but should detail the efforts made by MAHPL to obtain the documents in question and the nature of the searches undertaken. I have allowed just over five weeks for the documents to be located and discovered. Only one category of discovery is a general category (former category 4). I consider this period to be a reasonable period of time given the nature of the documents in question, and the need for this exercise to be completed in a timely fashion so that it does not impinge on trial preparation.
I certify that the preceding eighty-three (83) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Button. |
