In Glencore Investment Pty Ltd v Commissioner of Taxation of the Commonwealth of Australia  FCA 1432, in a major victory for the mining giant, the Federal Court found in favour of Glencore, and held that the terms operating between the Glencore Australian subsidiary and its Swiss trader parent in the sale of copper concentrate were within an arm's-length range.
Importantly, the court's decision has reaffirmed many of the key principles articulated in the Full Federal Court's 2017 decision in Chevron, and provides much needed guidance to multinationals on their cross-border transactions and transfer pricing issues.
The Australian Taxation Office (ATO) is appealing this decision at the Full Federal Court and the appeal process and outcome will be of great interest and significance.
The taxpayer was assessed as the head of a multiple entry consolidated group for Australian tax purposes, of which Cobar Management Pty Ltd (CMPL) is a member. In the relevant years, CMPL sold 100% of the copper concentrate produced at the CSA mine to its Swiss parent, Glencore International AG (GIAG).
The purchases were historically made under a series of "price sharing agreements". Broadly, the copper concentrate was priced by using, as a reference point, the official London Metal Exchange cash settlement price for copper averaged over a quotational period.
The commissioner's primary case was that the agreement was a non-arm's length dealing which favoured GIAG to the detriment of CMPL, and that an independent mine producer with CMPL's characteristics would not have agreed to price sharing at all.
Division 13 and Subdiv 815-A
The critical issue for the court was therefore to hypothesise a reliably comparable agreement not affected by the lack of independence and the lack of arm's-length dealing for the purpose of:
- Div 13 – determining whether the consideration actually given for the copper concentrate that CMPL sold to GIAG in the relevant years was less than the consideration which might reasonably be expected to have been paid between independent parties; and
- Subdiv 815-A, whether an amount of profits might have been expected to accrue to CMPL if the transaction it entered into with GIAG had been entered into, had CMPL and GIAG not been related and been dealing with each other at arm's length.
Identifying a substitute hypothesis
The court held that the price sharing arrangement was on arm's-length terms (both for division 13 or subdivision 815-A purposes). Importantly, Davies J made the following observations:
- The decision in Chevron makes it clear that the hypothetical should be based on the form of the actual transaction entered into between the associated enterprises but on the assumption that the parties are independent and dealing at arm's length. The commissioner's approach impermissibly restructures the actual contract entered into by the parties into a contract of a different character.
- The 1995 OECD Guidelines also stated that "in other than exceptional circumstances" the actual transaction should not be disregarded or other transactions substituted. Instead, any reconstruction is limited to the two "exceptional circumstances" namely:
- where the economic substance of the transaction differs from its form; and
- where, while the form and substance of the transaction are the same, the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises.
- The present case is not a case falling within either of the exceptions referred to in the OECD Guidelines because:
- the economic substance of what the parties transacted does not differ from the legal rights and obligations created by the agreements;
- there was no suggestion at all that tax considerations shaped the terms of the agreement; and
- the agreements were commonly seen in the commercial market between independent enterprises in the relevant years.
- A key ongoing aspect of applying Australia's transfer pricing provisions will be evaluating a hypothetical arrangement (or comparable hypothetical agreement) for the purpose of ascertaining the arms-length consideration (fundamentally a factual enquiry).
- Most importantly, for current and prospective transfer pricing risk management and planning, sub-division 815-A was replaced by sub-divisions 815-B to 815-E which are Australia's principal transfer pricing laws operative for income tax years commencing from July 1 2013.
- Sub-division 815-B includes a specific transfer pricing reconstruction provision, which empowers the ATO to reconstruct or disregard actual transactions, where these are not considered to be arm's length and to replace them with arm's-length conditions where:
- firstly, the form and substance of the actual commercial or financial relations is inconsistent,
- secondly, independent multinationals would not have entered into these relations and would have entered into alternative commercial or financial relations, or
- thirdly, independent entities would not have entered into commercial or financial relations at all. These are significant powers available to the ATO which we can expect the ATO to rely more heavily on the context of and following this Glencore decision.
- Senior officers of the ATO including Second Commissioner Jeremy Hirschhorn and Deputy Commissioner Jeremy Geale have recently been re-emphasising the importance of multi-national tax avoidance and the ATO's focus on ensuring multinationals have arm's length dealings with their Australian entities and that transactions are fairly priced and multinational companies do not underpay tax in Australia.
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