Glencore Transfer Pricing decision - Draft Impact Statement

TBA member James Strong discusses the Commissioner of Taxation's Draft Decision Impact Statement following the High Court's refusal to grant special leave to appeal in Commissioner of Taxation v Glencore Investments Pty Ltd [2021] HCA Trans 098. A PDF copy of this article is available to download below.

The Commissioner of Taxation (Commissioner) has published a Draft Decision Impact Statement (DIS) following the High Court’s refusal to grant special leave to appeal in Commissioner of Taxation v Glencore Investments Pty Ltd [2021] HCA Trans 098.

The special leave application in Glencore

The Commissioner’s grounds for seeking special leave included that the Full Federal Court in Commissioner of Taxation v Glencore Investments Pty Ltd [2020] FCAFC 187 (Glencore) erred in finding that the taxpayer had discharged its burden of proof - without adducing evidence as to which pricing mechanism was likely to have been entered into between independent parties in the position of the taxpayer and its Swiss affiliate had they dealt with each other at arm’s length in relation to the sale and purchase of copper concentrate from the taxpayer’s mine.

Specifically, Senior Counsel for the Commissioner submitted:

What is completely missing in this case is evidence about the “needs and risk appetites” of the buyer. What that evidence establishes is that, in the marketplace, some buyers and sellers enter into price-sharing agreements and some do not. It turns upon the “needs and risk appetites” of the counterparties and that matter was not addressed.

In our submission, the proposition now that the transfer pricing provisions can be applied by reference solely to what occurs in the marketplace, without reference to the particular circumstances of the taxpayer that would lead it to the conclusion that it would adopt one of a number of choices is a matter that should be revisited.”

The reasons for the Court refusing special leave were given by the Chief Justice, ex tempore, as follows: “The Commissioner seeks to overturn findings of fact upheld by the Full Court below. In our view no question of principle sufficient to warrant a grant of special leave arises. Special leave is refused.” The context for transfer pricing litigation in Australia

Before examining the Commissioner’s reaction to the decision in Glencore, it is necessary to say a little about the transfer pricing litigation landscape.

At its core, transfer pricing litigation involves examination by the Court of the objective facts which establish whether, and to what extent, the actual conditions which operate between the taxpayer and an offshore related party, in connection with their commercial and financial relations, differ from the conditions which might (reasonably) be expected to operate between independent parties dealing wholly independently with one another in comparable circumstances.

This examination takes place in the context of a challenge by the taxpayer to an assessment by the Commissioner. In that context, the burden is on the taxpayer to persuade the Court, through admissible evidence adduced, that the actual conditions which operated might (reasonably) have been expected to operate in the relevant hypothetical circumstances.

The decision in Glencore and Chevron – a tale of two taxpayers

Glencore is the third significant Australian appellate court decision of the past 10 years regarding transfer pricing - the others being the decisions of the Full Federal Court in Chevron Australia Holdings Pty Ltd v Commissioner of Taxation [2017] FCAFC 62 (Chevron) and in Commissioner of Taxation v SNF Australia Pty Ltd [2011] FCAFC 74.

In Chevron, Chevron Texaco Funding Corporation LLC (CTFC), a United States special-purpose subsidiary of the Australian taxpayer, borrowed funds, at an initial interest rate of 1.2%, by issuing USD-denominated, short-term commercial paper into the United States market supported by a guarantee from Chevron Corporation. CTFC used those funds to advance a 5-year, unguaranteed, AUD-denominated loan to its Australian parent (and head company of the Australian tax consolidated group) at