In the September 3 ruling, Judge Jennifer Davies set aside three tax assessments for income years ending June 30 2007, 2008 and 2009. She also dismissed the ATO’s reasons for the assessments and ordered the tax authority to pay costs to Glencore.
“Glencore welcomes the Federal Court decision in the matter relating to the pricing of copper concentrate sales by our CSA mine between 2007 and 2009,” a spokesperson from the company told ITR.
The ATO has said it "will consider this decision and whether an appeal is appropriate".
However, this case is a setback for the authority after winning landmark tax cases in recent years, such as Chevron. It has also been getting tougher on transfer pricing matters in recent years and the Chevron case has emboldened the ATO to challenge more multinationals. Oil company Shell is the latest to file an appeal against a large tax bill.
The ATO has seven days from the date of the ruling to appeal, but sources have told ITR that the tax authority will appeal.
Arm’s-length disagreement
Two of the points of contention in the Glencore case concerned whether or not transactions between the parent company and its Australian subsidiary were at arm’s length and if the fixed copper reference price at 23% for the payable copper content of the copper concentrate was correct.
The ATO said that payments made by the Swiss parent, Glencore International, to its Australian subsidiary, Cobar Management (CMPL), for the copper concentrate in 2007-09 were not at arm’s length.
The authority claimed the British-Swiss multinational commodity trading and mining company had paid A$72.3 million less than independent parties would have for the same payments. It added an additional A$20.5 for interest charges, amounting to a total bill of A$92.7 million in additional tax.
In addition, the ATO replaced the 23% price sharing mechanism that the company had used with a 50% benchmark and 50% spot copper reference price for the treatment and copper refining charges (TCRCs). The ATO said that industry benchmarks should have been used and identified the 50/50 rate as that used by the Australian subsidiary before the February 2007 price-sharing agreement between Glencore International and CMPL.
However, Justice Davies said the ATO misapplied Div. 13 of the Income Tax Assessment Act 1936 (now repealed) and Subdiv. 815-A of the Income Tax Assessment Act 1997. She said the payments made to CMPL under the February 2007 price-sharing agreement were within an arm’s-length range.
The court documents explain that Glencore’s primary case was different to that in Chevron, where the terms of the loan diverged from terms that might be expected between independent parties dealing at arm’s length with each other.
In contrast, the terms governing pricing under Glencore’s contractual arrangements, which applied to the 2007, 2008 and 2009 years, were terms that “existed in contracts for the sale of copper concentrate between independent market participants and were thus terms that might be expected to be found in an agreement between the relevant hypothetical parties”.
