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Price is right: Transfer pricing case decided in Federal Court

Transfer pricing case decided in Federal Court

The Federal Court delivered Glencore a significant win against the Commissioner of Taxation.

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Open pit mine

The Federal Court has delivered Glencore Investment Pty Ltd (Glencore) a significant win against the Commissioner of Taxation (Commissioner) in relation to the transfer prices it used on certain cross-border related party transactions associated with its Cobar copper mining operations.

The decision in Glencore Investment Pty Ltd v Commissioner of Taxation [2019] FCA 1432, delivered on 3 September 2019, has 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 [2017] FCAFC 62 (Chevron).

We understand that the Commissioner filed an appeal against the decision on 1 October 2019.

In summary, Justice Jennifer Davies held that:

a) Glencore had discharged the onus of proof that the amended assessments raised by the Commissioner under Division 13 and Subdivision 815-A were excessive.

b) The Commissioner’s primary case was rejected on the basis that the Commissioner had misapplied Division 13 and Subdivision 815-A.

c) On the evidence, the consideration that Glencore was paid for its copper concentrate in the relevant years was within an arm’s length range.

Key messages

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 [2011] 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”.

The Glencore case 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:

  • It is evident that identifying the hypothetical transaction continues to be problematic for the Commissioner. The decision may provide a catalyst for the Commissioner to revisit the approach being taken in a number of current audit cases 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, however, may provide little comfort to taxpayers that are unable to provide evidence of comparable dealings between independent entities.

Glencore reinforces that evidence is key and taxpayers should direct their attention to gathering a combination of evidence:

  • Providing evidence to all the facts and circumstances surrounding the tested transaction.
  • Analysis of comparable transactions.
  • Evidence that the comparable transactions identified are characteristic of typical arm’s length arrangements and via independent expert opinion where issues are more complex.

 

We explore these matters in more detail in the PDF.

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