By Carmen McElwain (Partner, Minter Ellison, Melbourne, Australia)
On 21 May 2021 the High Court of Australia (comprised of Chief Justice Kiefel and Justice Gordon) heard and refused an application for special leave sought by the Commissioner of Taxation (Commissioner) in relation to the Full Federal Court’s decision in Commissioner of Taxation v Glencore Investments Pty Ltd (2020)  FCAFC 187; 384 ALR 252 (Glencore).
The Commissioner had applied for special leave to appeal the Full Federal Court’s decision in Glencore. The Full Federal Court had earlier affirmed the Federal Court decision of Glencore Investment Pty Ltd v Commissioner of Taxation  FCA 1432. The dispute involved amended assessments of income tax for the 2007, 2008 and 2009 calendar years, and concerned the applications of Division 13 of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) and Subdivision 815-A of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997). While both of the aforementioned transfer pricing provisions have since been superseded by Subdivision 815-B of the ITAA 1997, Subdivision 815-B was of no application to the dispute having regard to it taking effect from 29 June 2013.
The Commissioner’s application was refused on the basis that it did not raise any question of law. Generally, the High Court will only entertain appeals if a question or principle of law is to be determined. The High Court found that the Commissioner was attempting to characterize factual matters as matters of law. The decision to refuse the Commissioner’s application highlights the importance of factual findings in transfer pricing cases, particularly in relation to expert evidence.
Transfer pricing principles
In essence, the principle the Commissioner had sought to argue at the special leave hearing was that it was not sufficient for a taxpayer to show that the consideration it received under an intercompany arrangement fell within an arm’s length range. Rather, the Commissioner argued a taxpayer needed to prove an exact arm’s length outcome that had regard to the specific circumstances of the taxpayer.
In this case, the Commissioner was specifically arguing that it was not sufficient for Glencore to show that the price sharing terms of the agreement under review (Agreement) could also be found in agreements between arm’s length parties.
The High Court referred to the terms of the Agreement being found to exist in the market place based on expert evidence led by Glencore. The High Court stated that the Commissioner was seeking to overturn findings of fact that had been upheld by the Full Federal Court and accordingly no question of law sufficient to warrant special leave arose. This was the primary basis for the High Court refusing the Commissioner’s application.
This result means Australia’s complex transfer pricing provisions have yet to be considered by the High Court, and the Full Federal Court decision in Glencore remains effectively undisturbed. It is therefore timely to revisit the key outcomes of that decision.
Commissioner of Taxation v Glencore Investments Pty Ltd (2020) 384 ALR 252
The Full Federal Court judgment comprised a joint judgment delivered by Justices Middleton and Steward, and another judgment by Justice Thawley (who agreed with the conclusions of the joint judgment but expressed a different view on the operation of Division 13 of the ITAA 1936, Subdivision 815-A of the ITAA 1997 and the OECD guidelines).
In this matter, the parties had largely agreed on the facts and what comprised the relevant law. Accordingly, as noted in the judgment, the ‘real contest…was as to which expert’s opinion should be preferred’ (see ).
The matter concerned intra-group arrangements for the sale of copper concentrate, whereby Cobar Management Pty Ltd (C.M.P.L.), a resident of Australia, sold copper concentrate to its ultimate parent, Glencore International A.G. (G.I.A.G.), a resident of Switzerland. The costs and pricing formulas used by the parties varied over time, but amended terms agreed in February 2007 triggered the dispute.
In the years under review, the Agreement (between C.M.P.L. and G.I.A.G) included a term that adopted a price sharing formula at a rate of 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.
The Full Federal Court unanimously found that the judgment of the Federal Court – in favour of the taxpayer – should remain, and that Glencore had proven the pricing under the agreements was arm’s length, with one exception, the basis of pricing a freight allowance in the 2009 year.
The Full Federal Court judgment contains important guidance on a number of issues arising in transfer pricing disputes in Australia, including:
- That there may be more than one possible arm’s length outcome, and thus a range of arm’s length outcomes is acceptable;
- The Commissioner identified a number of differences between the Agreement and contracts relied on by Glencore as comparable, seeking to render them irrelevant. The Full Federal Court considered these differences diminished the probative value of the comparable contracts, but did not negate their value entirely. The contracts were considered by the Court to be valid “reference points” – a “sounding board” – for the existence of particular contract features in the market (see )
- Evidence led in the Full Federal Court decision supports the proposition that quotational period optionality is favorable to a commodity trader (see -, ); and
- The Commissioner’s approach, in applying a “would have” test rather than considering “what might reasonably be expected” between independent parties in comparable circumstances, was rejected by the Full Federal Court (see ).