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Image courtesy of Voyager/Wikimedia Commons.

Chevron may have to pay $195 million in back taxes and other fees after an Australian court decided the company used a loan scheme between two of its corporate arms to shrink its tax bill.

According to the Sydney Morning Herald, Chevron created a Delaware registered subsidiary of its Australian company that borrowed about $2.45 billion at an initial interest rate of 1.2 percent and then lent the money to an Australian entity at a 9 percent interest rate.

The arrangement ran from 2004 to 2008, following Chevron’s acquisition of Texaco.

While Chevron argued the deal was setup to refinance its debt the court decided that “refinancing was not the dominant purpose of the scheme,” the AFP said.

The court found that the loan arrangement violated the arm’s length principle, a transfer pricing principle that is meant to ensure two entities within the same company act in their own self-interest.

“Refinancing could be achieved by borrowing at an arm’s length interest rate, which CAHPL (Chevron Australia Holdings Pty Ltd) did not,” Justice Alan Robertson said.

Robertson added that it was reasonable to conclude the arrangement had been set up “for the dominant purpose of obtaining a ‘scheme benefit’,” the AFP said.

The Australian Taxation Office told the news wire that Chevron could be hit with about $130 million (A$180 million) in back taxes along with about $32.5 million in penalties and at least $31.8 million in interest.

Chevron has 21 days to agree to the payments or file an appeal.

When asked if the company would appeal the decision a Chevron spokesperson told the Sydney Morning Herald the company will not comment on the matter while it considers an appeal.