The Federal Court recently issued a decision on whether dealings between Swiss-based Glencore International AG and an Australian subsidiary breached transfer pricing rules in relation to the sale and purchase of copper concentrate in the 2007 to 2009 years.
Insights into Court Approaches in Transfer Pricing Matters
The decision in Glencore Investment Pty Ltd v Commissioner of Taxation  FCA 1432, handed down on 3 September 2019, has significant implications for taxpayers, notably being the first transfer pricing case in Australia following the Full Federal Court’s decision in Chevron Australia Holdings Pty Ltd v Commissioner of Taxation  FCAFC 62 (Chevron).
The Glencore case in transfer pricing considers rules (Subdivision 815-A) the object of which is to ensure related Australian and non-resident entities are taxed consistent with the arm’s length principle. The Commissioner had argued before the Court that amendments made to an agreement between Glencore International AG and its Australian subsidiary were not arm’s length dealings. The Commissioner had issued Glencore with three sets of amended assessments that arose as a consequence of this.
The court rejected aspects of the Commissioner’s interpretation of the relevant transfer pricing rules. In doing so the court found that the terms operating between the Australian copper mine and its Swiss trader parent to calculate the price at which the mine sold its entire copper concentrate production were within an arm’s length range.
Implications of Glencore Case for Taxpayers
In summary, Justice Jennifer Davies of the Federal Court held that:
- Glencore had discharged the onus of proof that the amended assessments raised by the Commissioner under Division 13 and Subdivision 815-A were excessive.
- The Commissioner’s primary case was rejected on the basis that the Commissioner had misapplied Division 13 and Subdivision 815-A.
- On the evidence, the consideration that Glencore was paid for its copper concentrate in the relevant years was within an arm’s length range.
There are a number of practical implications that taxpayers should be mindful of from this decision.
The Federal Court in Glencore applied the principles established by the Full Federal Court in Chevron and Commissioner of Taxation v SNF (Australia) Pty Ltd  FCAFC 74 (SNF):
- Division 13 and Subdivision 815-A do not permit or require the construction of an abstract hypothetical agreement between abstract independent parties (Chevron).
- The evidentiary standard taxpayers need to meet in relation to comparability for purposes of Division 13 (and now also in relation to Subdivision 815-A) in order to satisfy the statutory onus of proof is not set at an unattainable height (SNF). The Commissioner’s submissions in relation to comparability in SNF and now again in Glencore have been described as being “deeply impractical”.
Importance of Documentation and Evidence in Transfer Pricing
The Glencore case in transfer pricing provides important insights into the approach the courts are likely to take when examining transfer pricing matters under Division 13 and/or Subdivision 815-A, for example:
- Identifying the ‘hypothetical transaction’ continues to be problematic for the Commissioner. The decision (if upheld on further appeal) may cause the ATO to alter its stance currently taken in compliance and audit activities having regard to how the courts are applying Division 13 and Subdivision 815-A.
- The Glencore case reinforces the position of taxpayers that have good comparables of dealings between independent entities.
Glencore reiterates that evidence is paramount and taxpayers should direct their attention to ensuring that transactions are appropriately documented, tested and analysed contemporaneously such that:
- Providing evidence to all the facts and circumstances surrounding the tested transaction.
- Performing an analysis of comparable transactions.
- Evidence that the comparable transactions identified are characteristic of typical arm’s length arrangements and the use of an ‘independent expert’ where issues are more complex.
On 1 October 2019, the Commissioner lodged an appeal against this decision to the Full Federal Court, and we await the decision in anticipation.