Glencore – Full Federal Court of Australia finds that it accorded with arm’s length transfer pricing for an Australian sub to agree to pricing that gave up some price upside for less volatility

An Australian subsidiary (“CMPL”) of Glencore Switzerland (“GIAG”), which had a high-cost copper mine, agreed with GIAG (who was the sole purchaser of the mine output) to amend its supply contract in early 2007 after there had been a surge in world copper prices. The Commissioner argued that CMPL had acted “irresponsibly” by agreeing in these amendments to “price sharing” which meant that CMPL would participate less in a high copper price over the 2007 to 2009 period, but with the benefit of less volatility in price.

The majority reasons found that for the transfer–pricing purposes at issue, it was posing the wrong question to ask “whether an arm’s length party would have agreed to the amendments, given the pre-existing terms of trade”, and that the correct question was simply whether “the pricing formula established by those [amended] terms did not differ from those formulae which might be expected to have operated between independent enterprises dealing wholly independently with one another in the copper concentrate market at the time”. In this regard, the majority concluded, in light inter alia of the evidence of the taxpayer’s expert witness as to industry contracting practice:

[T]he taxpayer has established that independent parties dealing at arm’s length with each other for the sale of the copper concentrate in fact sold by C.M.P.L. to G.I.A.G. from 2007 to 2009 might reasonably be expected to have agreed to a price sharing clause at the rate of 23% as part of the calculation of [the mooted aspect of the pricing formula].

Regarding an alternative pricing approach advocated by the Commissioner’s expert witness, they stated:

[H]is opinion that the parties should have adopted benchmark T.C.R.C.s [i.e., closer to spot pricing] appears to us to represent another possible position that arm’s length parties might reasonably be expected to have adopted. But the existence of this possibility does not negate our finding that price sharing using a 23% rate was also an arm’s length outcome.

Before so concluding, the majority made numerous observations on transfer pricing principles, as they bore on the determination of an arm’s length price, including:

  • “one should include all of the objective circumstances of the actual ... mine” and the “objective circumstances of the copper concentrate market as at February 2007”
  • however, “it would be appropriate to exclude any considerations that are the product of C.M.P.L.’s non-arm’s length relationship with G.I.A.G. and the broader Glencore Group” which “would include whatever attitude or policy C.M.P.L. had formed about the issue of risk when selling to G.I.A.G”
  • “C.M.P.L. … could legitimately adopt a more conservative approach to risk so long as it was commercially rational to do so, and it is what an independent party dealing at arm’s length might reasonably be expected to have done”
  • “the possibility of a range of arm’s length outcomes, each of which would be sufficient to answer the statutory test, is supported by authority”

Neal Armstrong. Summary of Commissioner of Taxation v Glencore Investment Pty Ltd [2020] FCAFC 187 under s. 247(2)(a).