Glencore – Federal Court of Australia finds that transfer pricing should take into account the division of functions between the two cross-border parties

An Australian Glencore subsidiary (“CMPL”) with a high-cost copper mine entered into a three year extension of an agreement for the sale of copper concentrate to Glencore (“GIAG”) with a number of complicated-to-describe features which, nonetheless, were not unusual for the industry, such as deductions for treatment and copper refining charges that were notional rather than based on the actual refining costs and “quotational period optionality with back pricing” (e.g., with elements of backdating that favoured GIAG.) The Commissioner did not think it coincidental that the result was that CMPL generated significantly less profit than if it had sold on less complicated terms, and assessed under the OECD-grounded Australian transfer-pricing rules.

Before concluding that “the taxpayer has established that the prices that CMPL was paid by GIAG for the copper concentrate it supplied to GIAG under the … Agreement were within an arm’s length range” (and before quoting with approval the statement in Cameco that “The traditional transfer pricing rules must not be used to recast the arrangements actually made among the participants,”) Davies J stated:

As made clear in Chevron, the task of ascertaining the consideration that might reasonably be expected would have been paid to CMPL for the copper concentrate that it sold to GIAG is not to be undertaken upon the hypothesis that CMPL was not a member of the Glencore Group. … [T]he relevant mine producer for the purposes of the [arm’s length] hypothetical agreement is a mine producer with all the characteristics of CMPL, which include … that it had no need for a logistics or marketing division because it sold the whole of its production for the life of the mine to a buyer with GIAG’s characteristics, namely a trader with a substantial marketing team which purchased the whole of the mine’s production for the life of the mine.

Neal Armstrong. Summary of Glencore Investment Pty Ltd v Commissioner of Taxation of the Commonwealth of Australia [2019] FCA 1432 under s. 247(2)(a).