In a unanimous decision on November 7 2020, the Full Federal Court of Australia dismissed the appeal of the Austalian Taxation Office (ATO) in the Glencore transfer pricing matter, except in relation to freight expenses in 2009.
A single judge of the Federal Court had earlier already found in favour of Glencore in 2019 (Glencore Investment Pty Ltd v Commissioner of Taxation of the Commonwealth of Australia [2019] FCA 1432). The dispute concerned the years of 2007, 2008 and 2009.
Background
The court delivered two judgments. A joint judgment of Middleton and Steward JJ. The other, by Thawley J., agrees with their conclusions, but expresses a different view on the operation of the Income Tax Assessment Act and OECD guidelines.
The joint judgment notes that the parties largely agreed on the facts, and what comprised the relevant law. It said however that “the real contest before us was as to which expert’s opinion should be preferred” (at paragraph 16).
Essentially, the matter concerned intra-group arrangements for the sale of copper concentrate. The group member which was the actual seller is referred to as CMPL in the judgments. The costs and pricing formulas used by the parties varied over time, but changes made with effect from 2007 triggered the dispute.
In the years under review, treatment costs and refining costs (TCRCs) were set at 23% of the copper price, which had the effect of sharing risk between the parties. The purchaser was given an option to select quotational periods on a shipment-by-shipment basis, rather than annually. It could select between two classes of arrangement, each having an ability to select one of three quotational period options on a shipment-by-shipment basis at a later time. The result of this approach was that the purchaser had knowledge of the average price in at least one of the quotational periods available to be selected, prior to each shipment.
On appeal, the court unanimously found that the judgment of the court below should remain, and that the taxpayer had proven the pricing under the agreements was arm’s-length, apart from the basis of calculation of freight charges in 2009.
The relevant provisions of the Income Tax Assessment Act varied over the years in question. Two sets of provisions were relevant, Division 13 (which now only has limited relevance for most taxpayers) and Subdiv. 815-A (introduced in 2012). The relevant principles in both sets of provisions were felt by both courts to be similar enough for the same analytical principles to apply (apart from some reservations expressed by Thawley J.).
The decision to agree to changes
The decision contains important guidance on a number of issues arising in transfer pricing disputes in Australia. However, perhaps the most important part of the joint judgment, was its conclusion on whether the domestic transfer pricing provisions, as they then were, could be used to attack the actual decision to change the inter-company arrangements.
The Commissioner’s argument, the court said, was “why would a party in the position of CMPL have agreed to such a debilitating change of terms” in February 2007. The court rejected this approach saying it was the wrong question (from paragraph 166).
The court endorsed the finding in the court below that the Act and the Transfer Pricing Guidelines required the arm’s-length principle be applied to the transaction actually undertaken. With limited explicit exceptions where substance differs from form, and where the arrangements differ from those that independent enterprises would have adopted (the so called ‘reconstruction exceptions’ in the OECD commentary).
The reconstruction exceptions in the OECD commentary were said to have been written in language which is “very highly generalised and is frustrating opaque”, and in any event “only a guide”. A clear preference was expressed for the domestic statute, with an observation that the Guidelines “may not be of much real assistance”.
The court concluded from paragraph 154, that in fact the Commissioner has the power, where a price under an agreement is specified as a formula, to replace it with a different formula where arm’s-length parties would have used the different formula. Moreover, the task is to identify only those clauses of an agreement “actually defining the consideration received”. While the task was acknowledged to be difficult in some cases, there is no power to alter clauses which “are not seen as defining the consideration received”. This includes clauses which “may indirectly bear upon price”.
The taxpayer’s evidence was sufficient for the court to be satisfied that the arrangement was one which arm’s-length taxpayers might enter into, and that the price paid was in an arm’s-length range.
The result is a judgment that reflects considerable flexibility around a transfer pricing conclusion.
Conclusion
There are comments throughout the judgment that are directly encouraging to taxpayers engaged in a transfer pricing dispute in Australia. It is also clear that other relevant provisions of the domestic law, such as the various avoidance provisions must also be considered.
Paul McNab
T: +61 292 868 664
