Case Overview
Glencore Investment Pty Ltd v Commissioner of Taxation [2019] FCA 1432 is a Federal Court transfer pricing decision about copper concentrate sold by Cobar Management Pty Ltd (CMPL), an Australian mine operator, to its Swiss parent/trader, Glencore International AG (GIAG), under life-of-mine offtake agreements.
Davies J rejected the Commissioner’s attempt to assess on the basis of a different (market-related) pricing model and found Glencore had proved the contract’s key pricing features were within an arm’s-length range. The amended assessments for the 2007–2009 income years were set aside (Davies J at [1], [3]–[6]).
Key Facts
- CMPL sold 100% of CSA mine copper concentrate to GIAG (Davies J at [1]–[3]).
- A February 2007 amendment introduced a “price sharing” model: TCRCs were fixed at 23% of the LME copper reference price (for the payable copper content) for calendar years 2007–2009 (Davies J at [3]).
- The agreement gave GIAG “quotational period” (QP) optionality, including “back pricing” (Davies J at [3]).
- The Commissioner made Div 13 and Subdiv 815‑A adjustments replacing (i) 23% price sharing with 50% benchmark/50% spot TCRCs and (ii) the QP term with a “consistently applied” QP (Davies J at [4]).
- The assessments increased assessable income by AUD 241,060,922 across the three years (Davies J at [1]).
Issues
- Under Div 13 and Subdiv 815‑A (Art 9 Australia–Switzerland treaty), could the Commissioner disregard the price-sharing contract structure and substitute a different “market-related” pricing methodology?
- If the actual pricing structure is recognised, were the 23% price sharing rate and the QP optionality terms within an arm’s-length range?
- (Raised in the litigation) Whether other pricing components (including freight for 2009) were arm’s length (see appeal history below).
Holding (Federal Court, Davies J)
- The appeal was allowed; objection decisions and amended assessments were set aside; costs awarded to the taxpayer (Orders, 3 September 2019).
- Davies J held the Commissioner’s approach “impermissibly restructures” the agreement into one of a different character and that (on the evidence) the 23% price sharing rate and QP optionality/back pricing terms were within an arm’s-length range (see ATO DIS summarising Davies J at [314], [317], [319]–[322]).
Reasoning (Why Glencore won at first instance)
- Statutory hypothesis anchored in the actual dealing: Davies J treated the exercise under Div 13/Subdiv 815‑A as identifying arm’s-length consideration/conditions for the transaction actually undertaken, rather than hypothesising a wholly different contract simply because the Commissioner considered independent parties would not have agreed to price sharing (ATO DIS citing Davies J at [314], [317]).
- OECD “reconstruction” as exceptional: Relying on the 1995 OECD Guidelines, Davies J considered that disregarding the transaction’s structure is only justified in narrow exceptional circumstances (eg substance differs from form, or commercially irrational arrangements that impede pricing), which were not made out (ATO DIS citing Davies J at [317], [319]–[322]).
- Evidence of industry practice and arm’s-length range: The taxpayer’s evidence included third‑party contracts showing that price sharing and QP optionality/back pricing existed in the market. Davies J accepted that the taxpayer had shown the contested terms (including the 23% price sharing rate) were within an arm’s-length range, and the Commissioner had not proven a quantified adjustment for QP optionality.
Subsequent History
On appeal, the Full Federal Court disagreed with Davies J’s conclusion that the Commissioner was impermissibly “restructuring” the contract. The Court held the Commissioner could substitute terms that “define the price” in order to determine arm’s-length consideration/conditions under Div 13 and Subdiv 815‑A (ATO DIS discussing [2020] FCAFC 187 at [155]–[156]).
However, the Full Federal Court still found the taxpayer had discharged its onus on the core pricing issues (price sharing and QP optionality). The Commissioner succeeded only on a confined point: the 2009 freight allowance, because no evidence was led to show why the 2009 freight terms were arm’s length (ATO DIS; [2020] FCAFC 187). The High Court refused special leave.
Takeaways for Practitioners
- Expect scrutiny of “price-defining” terms: After the 2020 appeal, the Commissioner may seek to substitute price-defining terms/methodology; resisting that requires evidence, not just legal argument.
- Arm’s-length range evidence matters: The taxpayer succeeded by showing the disputed terms sat within an arm’s-length range supported by market evidence.
- Comparables can be “reference points,” not silver bullets: Industry agreements may be probative even if imperfect, but non-comparable agreements alone may not be determinative (see ATO DIS discussion of the Full Court’s approach).
- Don’t forget “non-core” pricing components: Freight/insurance and other allowances can drive outcomes (as the Commissioner’s only success was on 2009 freight).
Related Content
To apply this decision in practice, review our Benchmarking Study Guide for building defensible arm’s-length ranges, and our glossary entry on the Comparable Uncontrolled Price (CUP) method, often central to commodity pricing. See also Chevron and the later Full Federal Court decision in Commissioner v Glencore [2020] FCAFC 187.
Frequently Asked Questions
Q: What is a “price sharing” clause for copper concentrate?
A: It fixes the buyer’s TCRC deduction as a percentage of the metal reference price (here, 23% of the LME copper reference price), rather than using benchmark/spot TCRCs.
Q: Can the Commissioner reconstruct or substitute terms under Div 13/Subdiv 815‑A?
A: Davies J said “restructuring” was only justified in narrow OECD‑recognised exceptions. But the Full Federal Court later held the Commissioner can substitute at least “price-defining” terms (while still losing on the main pricing issues on the evidence).
Q: What role did third‑party contracts/comparables play?
A: They were used as evidence that price sharing and QP optionality/back pricing existed in the market and to support an arm’s‑length range (not necessarily as perfect comparables).
Q: What is QP optionality with back pricing?
A: It allows selection among QPs after at least one period’s average price is known, giving the buyer flexibility in choosing the averaging window.
Q: What was the size of the adjustment?
A: The amended assessments increased assessable income by AUD 49,156,382 (2007), AUD 83,228,784 (2008) and AUD 108,675,756 (2009), with tax increases totalling AUD 72,318,276.60 and shortfall interest charges totalling AUD 20,358,336.67 (Davies J at [1])....