TP cases in the spotlight: Glencore transfer pricing dispute

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Written by Lawrence Nkomo and edited by Yandisa Xakata

TP cases in the spotlight: Glencore transfer pricing dispute

This article explores the Full Federal Court of Australia’s decision in Commissioner of Taxation v Glencore Investment Pty Ltd [2020] FCAFC 187, a key judgment in Australian transfer pricing jurisprudence. The dispute concerned copper concentrate sales between Glencore’s Australian subsidiary, Cobar Management Pty Ltd (CMPL), and its Swiss parent, Glencore International AG (GIAG). The Australian Taxation Office (ATO) challenged the pricing arrangements, but the court ultimately found in favour of Glencore. The decision provides important insights into how courts assess risk, comparability, and pricing methods in related-party transactions.

Introduction

The Glencore case centred on transfer pricing arrangements between CMPL and GIAG relating to copper concentrate sales. The ATO alleged that the pricing methodology—specifically, a price-sharing mechanism with quotation period optionality—resulted in CMPL undercharging GIAG, thereby reducing taxable income in Australia. The ATO issued amended assessments under Division 13 of the Income Tax Assessment Act 1936 and Subdivision 815-A of the Income Tax Assessment Act 1997. Glencore challenged the assessments, arguing that the agreed terms reflected arm’s length behaviour given the commercial risks involved.

Parties’ arguments

  • ATO position: The ATO contended that the price-sharing mechanism was not arm’s length. It sought to substitute the pricing formula with an alternative that it deemed more consistent with what independent parties would have agreed. The ATO also questioned the inclusion of quotation period optionality, arguing that it conferred a selective benefit to GIAG.
  • Glencore position: Glencore argued that the terms reflected legitimate risk allocation and commercial judgment, consistent with industry norms. The company provided evidence from an industry expert and referred to comparable third-party contracts to support the arm’s length nature of its pricing.

Court findings and reasons

The court upheld Glencore’s challenge, rejecting the ATO’s reconstructed pricing methodology and finding that the original pricing fell within an acceptable arm’s length range. Key findings include:

  • ATO’s limits in transaction reconstruction: While the court acknowledged the ATO’s ability to adjust non-arm’s length pricing, it emphasised that this power is not unfettered. The ATO may not arbitrarily disregard or rewrite terms that independent parties might reasonably agree upon.
  • Functional analysis and comparability: The court affirmed the use of comparable third-party contracts as valid reference points, despite differences. It noted that exact comparability is rare in commodity markets but still accepted the contracts as relevant support for Glencore’s pricing.
  • Recognition of risk and commercial rationale: The judgment acknowledged the volatility of the copper concentrate market and accepted Glencore’s conservative approach to pricing as commercially rational. The court highlighted expert testimony demonstrating that price-sharing arrangements were a prudent mechanism to manage market risks and contract stability.
  • Onus of proof: The court reiterated that the taxpayer’s burden is to prove that the assessment is excessive, not to disprove every aspect of the ATO’s argument. Glencore met this burden through expert evidence and relevant documentation.

Importance of the judgment in respect of transfer pricing

The Glencore decision contributes valuable guidance on the application of the arm’s length principle in a resource-driven context:

  • Clarification of ATO powers: The case places important boundaries on the ATO’s ability to reconstruct transactions, distinguishing between terms directly determining price and those indirectly affecting consideration.
  • Validation of pricing flexibility: The decision underscores that arm’s length pricing can accommodate a range of outcomes, particularly where independent entities might adopt different approaches to risk.
  • Comparables as reference points: While not perfect matches, the court recognised third-party contracts as useful benchmarks for testing related-party terms in practice.
  • Commercial substance over form: The court’s acceptance of Glencore’s risk management strategy reinforces the importance of aligning pricing with business realities, rather than theoretical models alone.

Relevance to South Africa

Although the Glencore ruling was made under Australian law, it offers lessons for South African taxpayers and tax authorities:

  • Application of the arm’s length principle: South African legislation also relies on the arm’s length standard, and the case highlights the importance of grounding pricing decisions in market conditions, commercial rationale, and genuine business practice.
  • Use of comparables: The emphasis on comparability—even where differences exist—supports the need for evidence-based benchmarking.
  • Risk and documentation: Glencore’s success was underpinned by detailed documentation and expert input. This highlights the importance of robust substantiation of transfer pricing arrangements, particularly in high-value or high-risk sectors like mining.
  • Dispute resolution strategy: The case illustrates the complexity and duration of transfer pricing disputes. South African taxpayers can mitigate this through early engagement with SARS and by exploring options such as advance pricing agreements (APAs).

Conclusion

The Glencore case highlights the importance of a pragmatic, risk-aware, and evidence-based approach to transfer pricing. It confirms that transfer pricing is not a rigid formula but a nuanced exercise in commercial realism. For multinationals operating in high-risk sectors, the case underscores the importance of aligning pricing methods with industry practice, supported by strong documentation and expert insight.