Australia: Evidence relevant for determining arrangements are at arm’s length (High Court decision)
The views expressed in the High Court’s decision have potential implications for Australia’s transfer pricing rules.
The views expressed in the High Court’s decision have potential implications
The High Court issued a judgment in a case concerning what evidence of the taxpayer’s particular circumstances is relevant for purposes as evidence of arm’s length arrangements and for purposes of determining whether the taxpayer’s arrangements are at arm’s length.
The High Court refused the Commissioner’s application for special leave against a decision of the Full Federal Court.
The case is: Commissioner v. Glencore Investment Pty Ltd  HCATrans 98 (21 May 2021).
The High Court considered that the case largely turned on its facts and did not involve a question of principle sufficient to grant special leave. The arguments presented by the Commissioner before the High Court were that:
- The Full Federal Court misapplied the transfer pricing provisions by allowing the taxpayer to prove a cross-border arrangement was at arm’s length by only relying on expert evidence that the transaction was within a range of arm’s length arrangements in the marketplace (rather than having to adduce evidence of the taxpayer’s particular circumstances to prove what the taxpayer would have agreed on an arm’s length basis).
- The taxpayer should have been required to adduce evidence of its risk appetite in order to meet its burden of proving how it would have entered the arrangement at arm’s length.
- The appropriate question (not addressed by the Full Federal Court) was with regard to the objective circumstances of the taxpayer, which agreement would be more likely to have been entered by the taxpayer at arm’s length—a price-sharing agreement? or one based on specific benchmark treatment and copper refining charges?
The High Court was not convinced by these contentions and instead appeared comfortable with the Federal Court’s findings of fact based on the relative credibility of the taxpayer’s expert evidence and third-party contracts.
The High Court decision summarises three considerations relevant to the application of the transfer pricing provisions (consistent with the judgement of the Full Federal Court) as follows:
- Consider the terms of the international agreement
- Consider the specific facts of the taxpayer to determine the application of the test, and
- In applying the test, it is not appropriate to apply some “straightjacketed view of the commercial world” but it is necessary to look at the circumstances of the taxpayer, including the market in which it operates.
While the case involved the application of Division 13 of the Income Tax Assessment Act 1936 and Subdivision 815A of the Income Tax Assessment Act 1997, the views expressed in the judgment have potential implications for Australia’s current transfer pricing rules (contained in Subdivision 815-B of the Income Tax Assessment Act 1997)—particularly with regard to the extent of what evidence of the taxpayer’s particular circumstances would be relevant for purposes of examining evidence of arm’s length arrangements and determining whether the taxpayer’s arrangements are at arm’s length. Tax professionals believe that taxpayers may expect to see this issue tested further by the Commissioner in future transfer pricing litigation.
For more information, contact a KPMG tax professional in Australia:
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Keith Swan | +61 2 9455 9261 | firstname.lastname@example.org
Annemarie Wilmore | +61 2 9346 5463 | email@example.com
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