The Commissioner of Taxation of the Commonwealth of Australia v Glencore Investment Pty Ltd (Special leave decision)

Kiefel J
Edelman J
Gordon J

Court appealed from: Full Federal Court

The Commissioner of Taxation of the Commonwealth of Australia
v. Glencore Investment Pty Ltd

[2020] FCAFC 187
2020 ATC 20-770
384 ALR 252
112 ATR 378
281 FCR 219
[2021] HCAtrans 98

Date of decision: 21 May 2021

Result: Special leave is refused with costs.



Copyright in the High Court of Australia

MR G.J. DAVIES, QC : If the Court pleases, I appear with my learned friends, MS M.L. BAKER and MR A.C. ROE, for the applicant. (instructed by Australian Government Solicitor)

MR J.W. DE WIJN, QC : If it please the Court, I appear with my learned friends, MS T.L. PHILLIPS and MS C.M. HORAN, for the respondent. (instructed by King & Wood Mallesons)

KIEFEL CJ: Yes, Mr Davies.

MR DAVIES: Your Honours, the case concerns the arm's length principle that underpins the transfer pricing provisions of Division 13 of the Income Tax Assessment Act 1936 and Subdivision 815A of the Income Tax Assessment Act. The arm's length principle relating to transfer provisions is enshrined in the many international tax treaties to which Australia is a party and it still operates in relation to those treaties. It also underpins Subdivision 815B of the Assessment Act 1997.

The issue that is raised by the special leave application, your Honours, concerns the essential inquiry that is mandated by the transfer pricing provisions of the legislation. The competing views, in our submission, are these. The first, the one found as a matter of principle by the Full Federal Court, is that in relation to an international agreement supply it is sufficient under the statutory test to determine whether the consideration received for the supply differed from the consideration which might be expected to have been received by a generic supplier - not the taxpayer, but by a generic supplier acting independently and at arm's length in the market.

Your Honours will see that statement of principle in paragraph 191 of the judgment of the plurality and paragraph 270(1) in the judgment of Justice Thawley. The language used in the two judgments is slightly different, but they are to the same effect. The Full Court disposed of the case then on the basis of evidence, not concerning how the taxpayer may have behaved in relation to - I withdraw that - not on the basis - - -

GORDON J: I thought they did. I thought that was the proposition. I thought that what happened was that there were two conditions or terms which were found by both the primary judge and upheld on appeal to be terms and conditions that you would expect in the international agreement between arm's length parties, and that is what you lost on.

MR DAVIES: Yes, that is so, your Honour.

GORDON J: So, you would have us seek to revisit a finding of fact that was unanimously upheld by four judges below?

MR DAVIES: No, your Honour, the finding, if I can put it in the context of a factual issue, the price sharing agreement - the finding that in the marketplace price sharing agreements with a 23 per cent discount, that was a type of agreement that parties acting at arm's length and independently would enter into the marketplace, is not under challenge.

GORDON J: Is that not your ground of appeal, or your proposed ground of appeal?

MR DAVIES: No, no, your Honour. Your Honour, can I go to the notice of appeal. Your Honours will see - - -

GORDON J: You talk about negating the non-arm's length conditions operating between the two entities.

MR DAVIES: Exactly, your Honour.

GORDON J: Being the two conditions which were found to be accepted below.

MR DAVIES: No, your Honour, it is negating the two arm's length conditions between the two parties to the agreement.

GORDON J: But they were found to be conditions that would be expected to exist between arm's length parties.

MR DAVIES: But that is the point, your Honour. I agree, it is very important, because this is the difficulty the Commissioner has with the decision.

GORDON J: But ultimately - - -

MR DAVIES: The question is - - -

GORDON J: - - - it came down to a question of evidence. You had two experts - the Commissioner's expert was criticised by the trial judge extensively, the taxpayer's expert was accepted by reference not only to the evidence but to the third-party contracts that were before the Court in order to buttress the evidence which was given.

MR DAVIES: Your Honour, can I take your Honour to paragraph 191.

GORDON J: On what page, please?

MR DAVIES: Page 260, your Honour. The principle stated by the plurality at line 15:

The task for the taxpayer was thus to demonstrate that the pricing formula established by those 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 our submission, that submission is an incorrect statement of principle. It should read, the task for the taxpayer is to demonstrate that the pricing formula established by those terms did not differ from those formulas which might have been expected to operate between the taxpayer and the counterparty on the hypothesis that the taxpayer had been acting independently and not at arm's length with the counterparty.

KIEFEL CJ: I think it was Justice Thawley who thought that an essential flaw in the Commissioner's approach was that it involved, effectively, rewriting the parties' agreement.

MR DAVIES: Well, your Honour, in our submission, it is a question of identifying the conditions that relate to it - the lack of independence and the lack of an arm's length dealing, and to negate them and that is the task.

KIEFEL CJ: Are you saying that the Commissioner is in a position to, and does argue that conditions agreed between the parties should not be regarded as proper conditions and one goes - - -

MR DAVIES: Yes, your Honour.

KIEFEL CJ: You do that by reference to the dispute between the experts.

MR DAVIES: Your Honour, you can do it by reference to the circumstances of the taxpayer, having regard to the circumstances of the market. There is absolutely no reason why one should not call in an expert about what is happening in the market. But the next question is, once you had evidence about what is happening in the market, what it is about the objective circumstances of the taxpayer that enabled the court to conclude, as a matter of expectation - that is, the likely outcome - that the taxpayer would adopt a particular course of action.

KIEFEL CJ: Essentially, what you are saying is that here are terms that independent parties at arm's length would have agreed and they are the ones that should be - they are the ones that the court should act upon - not those that were actually agreed between the parties. Essentially, that is what it comes to.

MR DAVIES: The inquiry, essentially, is to determine what the taxpayer might reasonably expected to have done if it were acting independently and at arm's length. So, the inquiry is all about the behaviour of the taxpayer. It may well be very relevant to determine what is available in the marketplace for the taxpayer to grab hold of because they are the sorts of things that are carried at arm's length. But, ultimately, the focus of the inquiry is upon the behaviour of the taxpayer.

GORDON J: That is what they did here. You had people looking to see what the terms were in the arrangements referable to the Pacific international agreement in issue - which is the thing that is the building block upon which all of these provisions work. Then, one is faced with a choice between experts about what else is available between arm's length parties to test a building block of the international agreement. It is a fact specific case, is it not?

MR DAVIES: The difficulty, your Honour, is that the statements of principle made in the court demonstrate that, provided an expert can show that there is a range of outcomes in the marketplace and the actual agreement entered into falls within that range of outcomes, that is the end of the case - irrespective of the particular circumstances of the taxpayer.

GORDON J: I had not understood that to be a statement of principle that was put so high. One sees it in, I think, stark terms in the judgment of Justice Thawley. What they are saying is three things. One is, it is an international agreement; second, it is fact specific; three, consistent with what Chief Justice Allsop said in Chevron you have to look to - you do not apply some straightjacketed view of the commercial world. One has to look at the circumstances of the taxpayer - to pick up your submission. Here, we have got a copper market. It is a specific market and you have to address it in that context.

MR DAVIES: If your Honour then goes to the end of paragraph 91, your Honour will see that the - - -

GORDON J: Paragraph 191.

MR DAVIES: Sorry, your Honour, 191 - that the plurality did not go the step further and say what the generic participant might do. It is having regard to the taxpayer's circumstances what it might be expected to have done. Your Honours will see:

The failure by C.M.P.L. -

this is the last sentence - - -

GORDON J: Well, it does, it says:

what independent enterprises might have done to address the -

very issues.

MR DAVIES: Yes, it is a concentration on the independent parties, your Honour.

GORDON J: No, no, no, it is - - -

MR DAVIES: Then it states:

The failure by C.M.P.L. -

and this is the difficulty, your Honour:

to lead evidence about its actual risk appetite or that of G.I.A.G. or the broader Glencore Group did not foreclose C.M.P.L.'s ability to lead expert evidence more generally about, and make submissions concerning, what independent enterprises might have done to address the issue of risk.

The question is, what might the taxpayer have done? If your Honours go back to paragraph 35, that is at page 208, in the middle of the paragraph:

No one gave evidence about C.M.P.L.'s appetite for risk taking in 2007, even though, as will be seen, the taxpayer's case turned upon how the issue of risk might bear upon the ascertainment of an arm's length price.

Then if your Honours go off the - - -

GORDON J: They did call Mr Kelly, though.

MR DAVIES: They did, yes, but his evidence did not relate to this matter and the learned trial judge did not accept his evidence as being relevant. If I can go to paragraph 210 - and this is the statement about the effect of the expert, Mr Wilson, for Glencore - it is the second-last sentence:

He did not seek to give evidence about any actual particular participant in the copper market. He candidly accepted that he had never been in the position of a high cost producer. Rather, he was giving an opinion about a generic participant in the copper market operating a high cost mine.

Then in paragraph 212 the plurality - this is on page 269 - we do not need:

to reject Mr Wilson's opinion. It also follows that . . . the taxpayer has established that independent parties dealing at arm's length -

Generic parties. Then it is made clear by Justice Thawley, as I stated at paragraph 270(1) - - -

GORDON J: At 246 he sets out the alternative view of the primary judge by reference to the two findings that her Honour made. Do you have an issue with what is set out in 246? It is on page 279 of the application book.

MR DAVIES: Sorry, your Honour, can I ask your Honour to repeat the question? Do I have an issue with - - -

GORDON J: What is set out at paragraph 246.


GORDON J: About the way in which her Honour has in the alternative addressed the matter, which is the way Justice Thawley addresses it precisely, by reference to paragraphs (1) and (2). Are you challenging paragraph (1)?

MR DAVIES: No, your Honour.

GORDON J: Or (2).

MR DAVIES: No, your Honour. We do not challenge that the evidence established that the agreement entered into was an agreement that one sees in the marketplace.

GORDON J: Thank you.

MR DAVIES: What we do challenge, your Honour, though, is the failure of the Full Court to address the issue as to what - if I can put it this way - contract might be expected that the taxpayer would have entered into.

GORDON J: That is where I have difficulties - I speak only for myself. We have a contract between these two entities. It is the contract that would be expected to be found in the marketplace.

MR DAVIES: It is a contract.


MR DAVIES: One of them.

GORDON J: One of them.

MR DAVIES: Other contracts, your Honour, are contracts without - that were not price sharing. So, they were various - - -

GORDON J: That is why it is a fight between the experts in a fact case?

MR DAVIES: No, your Honour. The question is, having regard to the objective circumstances of the taxpayer, which is more likely that the taxpayer would have entered into - a price-sharing agreement, which was entered into, or a benchmark TCRC?

GORDON J: Especially in circumstances where they had already entered into a price-sharing agreement which the evidence disclosed was not unusual in the market. MR DAVIES: But they are both usual in the market, your Honour. The question is which one and it was not addressed. If your Honour goes to paragraph 19(c), your Honour will see what - the evidence was stated very succinctly - stating of the findings by her Honour:

each contract is nonetheless individually negotiated and the detail and pricing of individual contracts varies greatly. Critically, her Honour accepted that such variation will depend "on the needs and risk appetites of the seller and buyer -

What is completely missing in this case is evidence about the "needs and risk appetites" of the buyer. What that evidence establishes is that, in the marketplace, some buyers and sellers enter into price-sharing agreements and some do not. It turns upon the "needs and risk appetites" of the counterparties and that matter was not addressed.

In our submission, the proposition now that the transfer pricing provisions can be applied by reference solely to what occurs in the marketplace, without reference to the particular circumstances of the taxpayer that would lead it to the conclusion that it would adopt one of a number of choices is a matter that should be revisited.

KIEFEL CJ: Thank you. Mr de Wijn, we will not need to trouble you.

The Commissioner seeks to overturn findings of fact upheld by the Full Court below. In our view no question of principle sufficient to warrant a grant of special leave arises. Special leave is refused.

Do you seek costs?

MR DE WIJN: Yes, we do, your Honour.

MR DAVIES: No objection.

KIEFEL CJ: Special leave is refused with costs.

The Court will adjourn to reconstitute.