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 [2021] HCATrans 98 (21 May 2021).

Summary

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.

KPMG observation

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:

Jeremy Capes | +61 2 9335 7665 | jeremycapes@kpmg.com.au

Keith Swan | +61 2 9455 9261 | keithswan@kpmg.com.au

Annemarie Wilmore | +61 2 9346 5463 | awilmore1@kpmg.com.au

The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization. KPMG International Limited is a private English company limited by guarantee and does not provide services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.