Series, Article 2 - Landmark court cases shaping the transfer pricing of financial transactions

Introduction

Transfer pricing disputes have traditionally focused on one main issue: whether the price of a related-party transaction matches what independent parties would have agreed. Recent case law suggests, however, that this is no longer enough. Courts and tax authorities now also ask a more fundamental question: does the transaction, and the structure used to implement it, have a genuine economic and commercial rationale?

Two key cases clearly illustrate this trend—Chevron Australia and BlackRock Holdco 5—and, read together with the Organization for Economic Co-operation and Development (OECD)’s Chapter X on financial transactions, they point to a clear and consistent trend in how intra-group financing arrangements are being assessed.

Chevron Australia: The full picture of arm's length financing

In 2003, Chevron Australia Holdings Pty Ltd (CAHPL) borrowed approximately AUD 3.7 billion from its wholly owned US subsidiary, ChevronTexaco Funding Corporation (CFC), under an unsecured, covenant‑free credit facility. CFC had raised those funds on the US commercial paper market at approximately 1.25% per annum and on-lent them to CAHPL at approximately 9%, creating a spread of nearly eight percentage points. The arrangement generated substantial interest deductions in Australia against revenue from Chevron's participation in the North West Shelf gas project, while the corresponding interest income was not taxable in the United States.

The Australian Tax Office (ATO) challenged the rate as exceeding the arm's length standard. Both the Federal Court at first instance (October 2015) and the Full Federal Court on appeal (April 2017) ruled in favor of the Commissioner. The Full Federal Court held that the arm's length analysis must cover the entire package of loan terms—not just the rate—including security and guarantees that independent parties would have required. The Court found that, in a real‑world scenario, Chevron’s AA‑rated ultimate parent would have provided a guarantee, which would have led to a significantly lower rate than 9%. It also highlighted an internal inconsistency: Chevron's own treasury policy required subsidiaries to obtain external financing at the lowest possible cost, typically backed by parental guarantee, but this approach was not followed for CAHPL in the intra‑group loan.

The 9% rate was therefore rejected. A commercially rational borrower in CAHPL's position would have used the group’s credit strength and secured third-party funding backed by a parental guarantee at a much lower cost. Setting the intra‑group loan rate as if no such guarantee were available was inconsistent with what independent parties in equivalent circumstances would have agreed.

Chevron ultimately settled with the ATO in August 2017, paying approximately AUD 340 million in tax, penalties, and interest. Decided under the Australian domestic transfer pricing legislation then in force, the case remains important because it confirms that pricing must be assessed in light of all the economic conditions of the financing, not just by comparing interest rates in isolation. As later reinforced by the BlackRock decision in another jurisdiction, courts are increasingly looking beyond the written terms of intra‑group loans to the broader commercial and economic reality of the arrangements.

BlackRock Holdco 5: Structure, dispute, and judicial journey

In 2009, BlackRock, Inc. acquired Barclays Global Investors (BGI) for approximately USD 13.5 billion, through a chain of US limited liability companies. As part of this structure, BlackRock Holdco 5 LLC (LLC5), a Delaware company tax-resident in the UK, borrowed USD 4 billion from its parent, LLC4, via intra-group loan notes, and used the funds to subscribe for preference shares in LLC6, which carried out the acquisition. The interest on these notes generated UK tax deductions surrendered to other BlackRock group members. HMRC  (His Majesty's Revenue and Customs) disputed these deductions on two grounds: that the loan was not at arm's length, and that LLC5 entered into the loan mainly to obtain a tax advantage, making it an unallowable purpose.

The transfer pricing dispute centered on the absence of contractual covenants. Both parties agreed that no independent lender would lent USD 4 billion on those terms. The key issue was how that absence should be treated in the arm's length analysis, a question that produced three different answers across three levels of court.

The First-tier Tribunal (FTT, 3 November 2020, [2020] UKFTT 443 (TC)) decided in favor of BlackRock on both grounds. For transfer pricing, it held that the arm’s length comparison could assume that third-party covenants from other BlackRock group companies would be in place; on that basis, the loan was at arm’s length and no adjustment was needed. For the unallowable purpose test, the FTT found that both a commercial and a tax purpose existed and that, on a just and reasonable apportionment, all debits were attributable to the commercial purpose.

The Upper Tribunal (UT, 19 July 2022, [2022] UKUT 199 (TCC)) upheld HMRC's appeal on both grounds. On transfer pricing, it ruled that importing third-party covenants that had no existence in the actual transaction materially altered the economically relevant characteristics of the arrangement and was therefore methodologically impermissible. Without such covenants, no independent lender would have made the loan, and the transfer pricing analysis supported a full disallowance. On the unallowable purpose issue, the UT held that the FTT had applied the wrong legal test.

The Court of Appeal (11 April 2024, [2024] EWCA Civ 330) allowed BlackRock's appeal on the transfer pricing issue and reinstated the FTT's approach. It held that an arm’s length analysis must ask what independent parties, in the same economic circumstances, would have agreed. LLC4, as parent, controlled the LLC6 sub‑group and had direct access to its dividend flows, so it did not need covenants; an independent lender without that control would have insisted on covenants to manage risk. Importing those covenants into the hypothetical comparator was the correct way to eliminate material differences in economically relevant characteristics. The Court also clarified that the mere fact that tax relief is an inevitable consequence of a loan does not, by itself, constitute a tax main purpose.

On the unallowable purpose issue, however, the Court of Appeal upheld HMRC. It found that LLC5 had both a commercial purpose, being the funding of the acquisition of BGI, and a tax advantage purpose. Applying the just and reasonable apportionment, the Court allocated 100% of the loan relationship debits to the tax advantage purpose. The decisive consideration was that LLC5 had no independent commercial role: the acquisition could have been completed without a UK‑resident company, and LLC5 existed primarily to create UK interest deductions. As a result, none of the interest was deductible.

It is important to note the precise scope of this conclusion. The Court did not disregard LLC5 as an entity, nor did it disregard the loan as a transaction, in fact, the loan was accepted as arm’s length for transfer pricing purposes. What the Court disallowed were the interest deductions, under the unallowable purpose rule, which focuses on why the company was party to the loan, not whether the loan was genuine. On the facts, the Court found that LLC5’s main purpose in entering the loan was to obtain a tax advantage, so all related debits were denied. This shows that even an arm’s length loan may not secure interest deductions if the borrowing entity lacks a standalone commercial rationale within the structure.

A consistent direction: Substance, rationale, and the OECD framework

Chevron and BlackRock reflect a consistent analytical approach to intra-group financing, despite arising in different countries and legal systems. In both cases, the courts went beyond a simple rate comparison and examined the overall commercial logic of the financing, including the terms that independent parties would have negotiated, the functions of each entity involved, and the consistency of the structure with the group's actual commercial conduct. Where that broader analysis revealed an absence of genuine economic substance, adverse tax consequences followed accordingly.

This approach aligns with Chapter X of the OECD Transfer Pricing Guidelines, introduced in 2020 as the first dedicated guidance on financial transactions and now a key reference for tax authorities across OECD member countries.

Three elements are particularly relevant:

1. Accurate delineation of the actual transaction: Start by identifying what the transaction really is (contract terms, functions, risks, and commercial context) before looking at pricing.
2. Options realistically available: Consider whether the borrower could have obtained equivalent financing from an independent lender at all, and on what terms, given its specific circumstances and group membership.
3. Lender's perspective: An independent lender would assess creditworthiness and require appropriate security or guarantees, and the absence of such protections in an intra-group loan directly affects the arm's length analysis, as both Chevron and BlackRock confirm.

For transfer pricing purposes, these developments suggest that documentation for intra‑group financing must go beyond explaining how the price was set. It should also clearly set out the commercial rationale for the structure: why the transaction was arranged as it was, what functions each entity performs, and how the arrangement relates to the group's broader treasury objectives.

In transfer pricing for financial transactions, the substance and rationale of the arrangement are now central to the analysis, and in some cases must be established before pricing is even considered.

Case references

• Chevron Australia Holdings Pty Ltd v Commissioner of Taxation [2015] FCA 1092 (Federal Court); [2017] FCAFC 62 (Full Federal Court).
• HMRC v BlackRock Holdco 5 LLC [2020] UKFTT 443 (TC); [2022] UKUT 199 (TCC); [2024] EWCA Civ 330 (Court of Appeal).
• OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, Chapter X — Transfer Pricing Guidance on Financial Transactions (2022).