Case Analysis: Mylan Australia Holding Pty Ltd v Commissioner of Taxation

Case Information:

  • Court: Federal Court of Australia
  • Case No: VID 770 of 2021; VID 526 of 2022
  • Applicant: Mylan Australia Holding Pty Ltd
  • Defendant: Commissioner of Taxation
  • Judgment Date: 20 March 2024


Judgment Summary:

The Federal Court of Australia ruled in favour of Mylan Australia Holding Pty Ltd (MAHPL) against the Commissioner of Taxation. The case revolved around the disallowance of interest deductions claimed by MAHPL under intercompany promissory notes (PN A2 and PN A4) used to finance the acquisition of Alphapharm, an Australian subsidiary of Merck Generics. The court found that MAHPL did not obtain a tax benefit within the meaning of Part IVA of the Income Tax Assessment Act 1936 (Cth) and that the assessments issued by the Commissioner were excessive.

Key Points of the Judgment:


  1. In 2007, Mylan Inc., the ultimate parent company of MAHPL, acquired the global pharmaceutical business Merck Generics, including Alphapharm, for approximately USD 7 billion.
  2. The acquisition was financed through debt and equity, with significant intercompany loans structured to optimize tax benefits.
  3. MAHPL claimed deductions for interest expenses incurred under intercompany promissory notes PN A2 and PN A4.

Core Dispute:

The core dispute centred on whether MAHPL obtained a tax benefit in connection with a scheme to which Part IVA of the Income Tax Assessment Act 1936 (Cth) applies. The Commissioner of Taxation argued that the interest deductions claimed by MAHPL were part of a tax avoidance scheme and issued determinations disallowing these deductions.

Court Findings:

  1. Tax Benefit: The court found that MAHPL did not obtain a tax benefit as defined under Part IVA. The primary counterfactual proposed by the Commissioner, which assumed a 100% equity-funded acquisition, was deemed unreasonable.
  2. Dominant Purpose: The court concluded that the dominant purpose of the scheme was not to obtain a tax benefit. The structuring of the acquisition, including the use of intercompany loans, was driven by commercial considerations.
  3. Counterfactual Analysis: The court rejected the Commissioner’s primary counterfactual and accepted MAHPL’s counterfactual, which involved a mix of debt and equity funding. The court found that a mixed funding approach was more commercially realistic and aligned with Mylan’s overall financial strategy.
  4. Overall Foreign Loss (OFL) Position: The court considered Mylan’s OFL position in the US, which would have resulted in an inability to claim foreign tax credits for income taxes paid in Australia under a 100% equity-funded scenario.
  5. Repatriation of Funds: The court accepted that Mylan intended to repatriate free cash flow from its subsidiaries to service external debt and reduce leverage, contrary to the Commissioner’s arguments.
  6. Interest Rates and Terms: The court examined the terms of the intercompany loans, including the fixed interest rate applied to PN A2, and found them to be commercially reasonable.


The court ruled in favour of MAHPL, finding that the assessments issued by the Commissioner were excessive. The court ordered the parties to provide draft orders giving effect to the judgment and to file submissions on costs if there was any disagreement.

Transfer Pricing Method Used:

The case involved using intercompany promissory notes (PN A2 and PN A4) to finance the acquisition. The interest rates on these notes were benchmarked to ensure they were at arm’s length, as required under transfer pricing regulations.

Major Issues or Areas of Contention:

  1. Tax Benefit: Whether MAHPL obtained a tax benefit in connection with the scheme.
  2. Dominant Purpose: Whether the dominant purpose of the scheme was to obtain a tax benefit.
  3. Counterfactual Analysis: The reasonableness of the Commissioner’s primary counterfactual versus MAHPL’s proposed counterfactual.
  4. Repatriation of Funds: The intention and ability of Mylan to repatriate free cash flow from subsidiaries to service debt.
  5. Interest Rates and Terms: The commercial reasonableness of the intercompany loan terms.

Decision Analysis:

The decision was somewhat expected given the commercial rationale behind the structuring of the acquisition. However, it was controversial due to the significant tax implications and the Commissioner’s aggressive stance on disallowing the interest deductions.

Significance for Multinationals and Revenue Services:

  1. Importance of Commercial Rationale: The judgment underscores the need for robust commercial justification in structuring cross-border acquisitions and intercompany financing arrangements.
  2. Transfer Pricing Documentation: The case highlights the importance of maintaining comprehensive transfer pricing documentation to support intercompany transactions.
  3. Tax Planning Considerations: Multinationals must carefully consider the interplay between different tax jurisdictions when structuring international acquisitions and financing.
  4. Revenue Authority Approach: The decision may influence how revenue authorities approach similar cases involving complex international structures and intercompany financing.

Value of Transfer Pricing Expertise:

Transfer pricing expertise ensures that intercompany transactions are conducted at arm’s length and comply with local and international tax regulations. In this case, the benchmarking of interest rates on intercompany loans was a key factor in the court’s decision. The case demonstrates the importance of:

  1. Structuring intercompany financing arrangements
  2. Benchmarking interest rates and other terms to ensure arm’s length pricing
  3. Preparing robust transfer pricing documentation
  4. Defending transfer pricing positions in disputes with tax authorities

Preventative Measures:

To avoid disputes like this, companies should implement a proper tax risk management process and establish a tax steering committee. This includes:

  1. Implement a comprehensive tax risk management process
  2. Establish a tax steering committee to oversee tax planning and compliance
  3. Regularly review and update transfer pricing policies and documentation
  4. Conduct thorough benchmarking studies to support intercompany pricing
  5. Maintain detailed documentation of the commercial rationale behind tax planning strategies
  6. Ensure alignment between tax planning and overall business objectives

For more information on the importance of a tax steering committee, click here.

In Closing

This case serves as a reminder of the complex interplay between tax planning, transfer pricing, and commercial considerations in international business operations. It highlights the need for multinationals to carefully balance tax efficiency with robust commercial justification and comprehensive documentation.

Related Articles