Talking Tax – Issue 171

New position on transfer pricing

In Glencore Investment Pty Ltd v Commissioner of Taxation of the Commonwealth of Australia [2019] FCA 1432, Justice Davies of the Federal Court of Australia ruled in favour of the taxpayer by finding that the price paid by Glencore did not breach the transfer pricing rules in relation to the sale and purchase of copper concentrate in the 2007 to 2009 income years.

This case considered Subdivision 815-A of the Income Tax Assessment Act 1997 (Cth), the object of which is to ensure that related Australian and non-resident entities are taxed consistent with the arm's length principle.

Key takeaways

The case provides additional clarity on the operation of Australia’s transfer pricing rules, being the first significant case handed down by the Federal Court on this issue since Chevron Australia Holdings Pty Ltd v Federal Commissioner of Taxation (2017) 251 FCR 40; [2017] FCAFC 62 (Chevron).

However, this case involves the 2007 to 2009 income years and therefore Davies J only dealt with the application of Subdivision 815-A.  The extent to which Davies J’s findings will impact Subdivisions 815-B to 815-D (which supersedes Subdivision 815-A for income years commencing on or after 29 June 2013) remains to be seen.

Taxpayers who are at the risk review or audit stage will need to carefully assess their circumstances in light of this decision.

The Commissioner of Taxation has 28 days to file an appeal, and is currently considering this decision and whether an appeal is appropriate.

Under an offtake agreement, Glencore International AG (Glencore) acquired copper concentrate from its Australian subsidiary, which owned and operated a mine in Australia.  The Court heard evidence establishing that there was uncertainty in future copper prices and higher costs associated with the mine in 2007, which led to pricing changes in the agreement between the parties.

The Commissioner argued that the amendments made to the agreement were not arm’s length dealings.  As such, the Commissioner considered what independent parties acting at arm’s length would have agreed on, and sought to reconstruct the arrangement accordingly.

Glencore was subsequently issued with three sets of amended assessments on the basis that the consideration paid to its Australian subsidiary was less than the consideration that might reasonably be expected to have been paid in an arm’s length dealing between independent parties.

The Court rejected aspects of the Commissioner’s interpretation of the relevant transfer pricing rules, and found that the terms operating between Glencore and its Australian subsidiary were within an arm’s length range.

Justice Davies confirmed that Chevron is not authority that Subdivision 815-A asks what form of agreement might have been negotiated by entities dealing with each other at arm’s length. That approach was rejected by the primary judge in Chevron, and nothing contrary is said in the Full Court decision.  Further, Chevron is not authority for the proposition put by the Commissioner, namely that the hypothetical transaction is to be identified as a wholly differently structured agreement for the sale of concentrate to the actual agreement which the parties entered into.

Justice Davies indicated that the analysis should not occur between “abstract independent parties” and that “the actual characteristics of the taxpayer must, therefore, ordinarily serve as the basis in the comparable agreement”.

Corporate Tax - Residency review

On 5 August 2019, the Federal Treasurer requested that the Board of Taxation (Board) review the operation of Australia's corporate tax residency rules to ensure that the corporate tax residency rules are operating in light of modern, international, commercial board practices and international tax integrity rules.

The Board has just released a Consultation Paper to initiate the first part of its review.  The paper sets out the Board’s observations on the current corporate residency rules and raises questions about the ongoing viability of these rules for stakeholder consideration.

The Board now seeks your input via the consultation options that are set out on the Board of Taxation website.

The review is welcomed, given the uncertainty created by the relatively recent shift in the Commissioner’s interpretation of how the central management and control test of company residency is applied.

The Commissioner’s current interpretation can be found in Taxation Ruling TR 2018/5, Ruling Compendium TR 2018/5EC and Practical Compliance Guideline PCG 2018/9.

Our article Bywater – Justification For A Changed View discusses the Commissioner’s view in detail.

Latest update on The Optical Superstore payroll tax case

Following findings (mostly) in favour of the taxpayer in the Victorian Civil and Administrative Tribunal and the Supreme Court of Victoria (as reported in Talking Tax issues 113 and 136), the Supreme Court of Victoria’s Court of Appeal has allowed the Commissioner to appeal the decision.

As reported in Commissioner of State Revenue v The Optical Superstore Pty Ltd [2019] VSCA 197, the Commissioner sought leave to appeal on five proposed grounds, of which the following three were accepted by the Court of Appeal:

  1. “The learned appeal judge misconstrued the words ‘amounts paid or payable’ in s 35(1) of the new Act and s 3C(2)(c) of the old Act by deciding that the expression was not apt to describe the transfer of legal title in money to satisfy a beneficiary’s equitable entitlement to that money.
  2. The words ‘amounts paid or payable’ in s 35(1) of the new Act and s 3C(2)(c) of the old Act should have been construed broadly, so as to capture the provision, giving or transfer of moneys from a bank account of one entity to another entity irrespective of the existence of an express trust.
  3. The learned appeal judge erred in determining that distributions to a beneficiary from an express trust are not ‘amounts paid or payable’ because the beneficiary always owned the funds held on trust and therefore property does not pass in the funds.”

Accordingly, the Court of Appeal will direct that the existing orders be set aside and the parties are to submit draft orders as to the consequential orders that should be made, after attempting to reach agreement on these matters.

This article was written with the assistance of Anne Wong, Law Graduate.


Frank Hinoporos

Frank Hinoporos the Hall & Wilcox Tax team. He advises on direct taxes, international structuring and taxation disputes.

Adam Dimac

Adam is an experienced tax lawyer, advising on a range of matters, including Division 7A, CGT and corporate restructuring.

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