Transfer pricing win for the taxpayer: High Court dismisses ATO’s special leave application to appeal against Commissioner of Taxation v Glencore Investment Pty Ltd

On Friday 21 May 2021, Kiefel CJ and Gordon J of the High Court of Australia dismissed the Commissioner of Taxation’s (Commissioner) special leave application to appeal against Commissioner of Taxation v Glencore Investment Pty Ltd (2020) 384 ALR 252 (Cobar), marking a win for the taxpayer and cementing the Full Federal Court’s Cobar decision as one of the leading domestic authorities on Australia’s complex transfer pricing provisions.

The matter focused on an offtake agreement for the sale of copper concentrate from Australian miner Cobar Management Pty Ltd (CMPL) to related party Glencore International AG (GIAG) in Switzerland. The Commissioner took issue with the agreement’s 23% price sharing formula and the quotational period optionality provided for in the agreement (together, the pricing mechanism), arguing that a hypothetical independent seller with the characteristics of CMPL would not have agreed to these terms and that the pricing mechanism therefore did not constitute arm’s length consideration. The Commissioner also took issue with the agreed freight credits albeit that this issue was insignificant in the overall matter.

The Commissioner relied on Division 13 of the Income Tax Assessment Act 1936 (Cth) and Subdivision 815-A of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) – transfer pricing provisions which have since been superseded by Subdivision 815-B of the ITAA 1997 – to issue amended assessments for the 2007, 2008 and 2009 calendar years.

First instance – Federal Court of Australia

The taxpayer successfully appealed against the Commissioner’s objection decisions in the Federal Court of Australia (Glencore Investment Pty Ltd v Commissioner of Taxation (2019) 272 FCR 30), relying on expert evidence and a series of comparable agreements between independent parties to argue that hypothetical unrelated counterparties in the position of CMPL and GIAG might reasonably be expected to agree to the pricing mechanism and the freight credits provided for in the contract.

Justice Davies found that, while the independent agreements tendered into evidence were not precisely comparable with the impugned agreement, they contained sufficiently comparable terms or data points to establish that the related party pricing mechanism fell within an arm’s length range.

Appeal – Full Federal Court of Australia

The primary judge’s decision was unanimously upheld on appeal by the Full Court of the Federal Court of Australia (Middleton, Steward and Thawley JJ), with the exception of the freight credits in the 2009 year only. In their joint judgment, Middleton and Steward JJ held inter alia that, in determining the parameters of the hypothesis required under both Division 13 and Subdivision 815-A, one should exclude any considerations which are the product of the non-arm’s length relationship between the contractual counterparties, but should otherwise clothe the hypothetical transaction with the objective attributes of the actual transaction insofar as those attributes can affect the consideration payable under the transaction.

As such, and in contrast to the Commissioner’s arguments, their Honours held that, on the facts and circumstances of this case, it was not necessary for the taxpayer to lead evidence of what CMPL would have actually done had it been independent of GIAG (e.g. by tendering lay evidence about CMPL’s risk appetite), and that it was appropriate for the taxpayer to instead lead evidence about how an independent party might have addressed risk in objectively comparable circumstances, provided the approach posited was commercially rational. The Court accepted that, as a result, there may be “a range of arm’s length outcomes, each of which would be sufficient to answer the statutory test”, and stressed that the appropriate level of depersonalisation will be highly fact dependent – in other words, “a degree of flexibility and pragmatism are required”.

The special leave application

In his special leave application, the Commissioner argued that the Full Federal Court’s views about the extent to which the hypothetical transaction should be depersonalised from the circumstances of the actual transaction was contrary to what was required under Division 13 and Subdivision 815-A. In this regard, he argued there was a need for High Court intervention, suggesting there is a tension between Cobar and prior transfer pricing decisions of the Federal Court (namely Chevron Australia Holdings Pty Ltd v Federal Commissioner of Taxation (2017) 251 FCR 40 and Federal Commissioner Taxation v SNF (Australia) Pty Ltd (2011) 193 FCR 149).

Kiefel CJ and Gordon J did not accept these arguments. They appeared to take the view that the contentions of the Commissioner in his special leave application related to questions of fact, determined by reference to a particular industry and factual matrix and based on specific expert evidence. As such, they were unwilling to revisit the factual findings of the primary judge who had heard this evidence first-hand and assessed it. Their Honours ultimately held that there was no question of principle to warrant leave to be granted.

This leaves Cobar as one of the leading transfer pricing authorities in Australia, and means that both taxpayers and the Commissioner are bound to follow the decision of the Full Federal Court. Cobar provides some certainty to taxpayers around what is required to satisfy the arm’s length test – in this regard, one of the key determinants is whether the consideration is within an arm’s length range which independent parties in the marketplace might reasonably be expected to enter and not necessarily whether the entities in question would have actually entered the agreement had they been independent of each other. Of course, this consideration must always be tempered by the particular facts and circumstances of the taxpayer.

Finally, Cobar only concerned Division 13 and Subdivision 815-A. It is possible the Commissioner may say that because the statutory provisions in question have been superseded by Subdivision 815-B, the Full Court’s decision is of limited use. Our view is such an approach is too narrow. The Full Court’s decision ought to remain important to the new statutory provisions, particularly on what the taxpayer is required to prove to satisfy its burden of establishing a transaction was on arm’s length terms.

About the authors

	Jerome Tse, CTA, is a Partner at King & Wood Mallesons, specialising in taxation disputes and litigation. Jerome is also the firm’s global transfer pricing coordinator. Jerome is an experienced tax practitioner and has been involved in a number of Australia’s recent high profile tax cases. He is the current Vice President of the Tax Institute.
	Natalie Tatasciore is an experienced Dispute Resolution lawyer with a track record of advising on some of Australia’s most high profile litigation matters throughout her career, including major insolvency and tax related litigation. Her client base includes leading banks and accounting firms.
	David Blight is a solicitor in the tax and commercial litigation teams at King & Wood Mallesons. He previously worked in tax law at Ernst & Young. He has assisted clients across resources, financial services, real estate, government, consumer products, IT, and elsewhere with ATO disputes, legal advisory projects and corporate transactions.