In the last year or so, Australian courts have passed judgment on two cases that have involved transfer pricing: Optus and Glencore
Last year, the federal court dismissed an appeal by Singapore Telecom Australia against the denial of AUD 895 million of intra–group interest deductions. The dispute concerned interest deductions arising from loan notes issued between related parties as part of the acquisition of the Australian Optus business, in light of a series of amendments to the original arrangement. The court accepted that the original interest rate of BBSW + 1.00% was arm’s length, given it was consistent with the group’s borrowing costs.
The court also found that the hypothetical loan transaction included a parent company guarantee. Further, the court did not accept that
independent parties would have agreed to amendments that deferred, but increased, interest payments. In short, the decision confirmed the
authority of the ATO to alter both the prices and terms of the related-party arrangements to apply the arm’s length standard.
Regarding the facts and evidence of this case, it also suggests the court’s willingness to intervene where there is a suggestion that
there may be a tax motivation for the arrangement.
In late 2020, the tax commissioner’s appeal to the federal court to review an earlier decision in the Glencore
case was dismissed. The transaction under review involved a related-party sale of copper concentrate where treatment costs and
refining costs were determined based on 23% of the copper price. The related-party contract granted the purchaser an option to select a
quotation period on a shipment-by-shipment basis from a number of options, rather than annually, with the effect that the purchaser had
access to information about the average price in at least one of the quotation periods available to be selected, before each shipment,
even though the purchase price for the sale was negotiated and agreed without reference to the average price.
In its decision, the court confirmed that the OECD transfer pricing guidelines required the arm’s length principle to be applied to the transaction actually undertaken. The TPG court noted that the OECD guidance was said to be written in language that is highly generalised, frustratingly opaque, only a guide, and may not be of much real assistance. In any case, the court decided that, in fact, the commissioner has the power, where a price under an agreement is specified as a formula, to replace it with a different formula where arm’s length parties would have used that different formula.
In the case of the taxpayer, the evidence showing in the agreement with the company had sufficient indicia of commerciality to persuade the courts that his company arm’s length dealings. This shows that so long as you and your affiliated person(s) maintain evidence that suggests the arrangement between you is reasonably consistent with commercial practices, the courts will likely accept that evidence.
