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Transfer Pricing and Cross-Border Financing: Lessons From The Singtel Case

Singapore Telecom Australia Investments Pty Limited (Singtel) v Commissioner of Taxation [2021] FCA 1597 is a recent transfer pricing ruling by the Federal Court of Australia.

Singapore Telecommunications Ltd (SingTel Limited) is a public listed company based in Singapore which specialises in providing telecommunications systems and services. In 2001, Singtel Australia Investment Ltd (SAI) and Singapore Telecom Australia Investments Pty Ltd (STAI) were established in Singapore and Australia, respectively. Both SAI and STAI were ultimately 100% owned by SingTel Limited.

In late 2001, SAI purchased 100% of the shares in Cable & Wireless Optus Ltd, which was then renamed to Singtel Optus Pty Ltd (SOPL). In 2002, as part of the group restructuring process, STAI acquired all the shares in SOPL from SAI to streamline the group's operations.

The consideration for the purchase included the issuance of $9 billion worth of ordinary shares to SAI and $5.2 billion in loan notes under a Loan Note Issuance Agreement (LNIA).

Illustration of the corporate structure of Singtel Limited:

After the issuance of the shares, STAI became the holding company of a group of companies including SOPL, which operated the Optus telecommunications business in Australia. The LNIA allowed STAI to issue ten loan notes to the subsidiary, with each note being redeemable at any time within a maximum period of ten years following the year in which the advance was made.

The LNIA initially set the interest rate for the loan notes at the 1-year Bank Bill Swap Rate (BBSW) plus 1% per annum, with an applicable rate calculated by multiplying the interest rate by 10/9. However, the agreement was subsequently amended three times to set a maturity date that could not be later than the tenth anniversary of the issuance date less one day, to make the accrual and payment of interest contingent on certain benchmarks, and to replace the 1 year BBSW with a fixed rate of 6.835%.

The Australian tax authority made transfer pricing determinations under Division 13 of Part III of the Income Tax Assessment Act 1936 and Subdivision 815-A of the Income Tax Assessment Act 1997, both of which resulted in amended assessments for STAI for the period between March 2010 and 2013. The amended assessments were based on the position that the interest rate on the loan notes exceeded the arm's length rate. STAI objected to the amended assessments but the objection was disallowed by the tax authority which resulted in an appeal by STAI.

Court’s Findings

The Australian Federal Court's ruling was mainly grounded on the application of Subdivision 815-A of the ITAA to ascertain whether STAI obtained any transfer pricing advantage from the LNIA. The court found in favour of the tax authority on the premise that STAI failed to prove that the amended assessments were excessive. STAI’s hypothesis of a debt capital market bond issuance was not consistent with the actual transaction between STAI and SAI. According to the Australian court, independent parties in the position of STAI and SAI would have been expected to agree to issue loan notes with an interest rate of 1 year BBSW + 1.00% with interest deferral and capitalisation and a withholding tax gross-up, subject to a parent company guarantee. The withholding tax gross-up was accepted by the court as an arm's length condition as independent parties could be expected to defer and capitalise interest. However, the court rejected STAI’s adoption of the financial benchmarks "interest free" and "premium interest rate" period concepts, which were not consistent with a debt capital market issuance.

Additionally, the court determined that independent parties would not have agreed to the 2003 amendment, which introduced the financial benchmarks, "interest free" and "premium interest rate" period concepts. This amendment made the accrual of interest contingent on financial benchmarks and exposed both parties to significant risks with no commercial rationale. The court also found that independent parties would not have agreed to the 2009 amendment to fix interest rates as STAI had committed funds under the Loan Notes for a further 3.5 years.

In reaching its conclusion, the court focused on Subdivision 815-A which highlighted that hypothetical parties must have the characteristics and attributes of the actual parties to the transaction. In this matter, the court found that a parental guarantee would reasonably be expected between independent parties and that a parental guarantee would reasonably have been given. The key differences impacting price between the court's hypothesis and STAI’s position were the use of a traditional deferral and capitalisation mechanism, the existence of a parental guarantee and the fact that a floating rate of BBSW + 1.00% operated rather than a fixed rate of interest from March 2009 until maturity.


To conclude, the Singtel Limited case has reinforced the importance of the arm's-length principle in transfer pricing rules, particularly in intra-group financing. It highlights the need for multinationals to anticipate heightened scrutiny on such transactions to ensure compliance. The case provides clarity on key principles underlying Australian transfer pricing provisions, helping businesses operating in the country. This decision serves as a reminder for companies to carefully evaluate their transfer pricing practices and follow relevant regulations to avoid legal and financial consequences.

As for the impact on the Malaysian transfer pricing scene, taxpayers should avoid pitfalls such as inadequate documentation and failure to conduct comparability analysis. Overall, this decision underscores the need for companies to carefully consider their transfer pricing practices and ensure compliance with relevant regulations to avoid potential legal and financial consequences.

This case is currently under appeal to the Full Federal Court of Australia, which hears appeals from single judges of the Federal Court.

 12 May 2023


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