TPcases

Alcoa of Australia Ltd. is engaged in mining and sold smelter-grade alumina to an unrelated party, Aluminium Bahrain B.S.C., under long-term contracts.

[Australia’s transfer pricing legislation is applicable if an Australian entity gets a tax benefit in Australia from non-arm’s length cross-border conditions, regardless of whether the parties are related to one another. There are no control or ownership thresholds for the legislation to apply. This ensures that independent parties engaging in, for example, collusive behavior or other practices where they are not dealing exclusively in their own economic interests will not circumvent the rules by reason of their non-association.]

Following an audit in which the arm’s-length pricing of the transactions was tested using the CUP method, the tax authorities concluded that Alcoa had not received an arm’s-length consideration for its sale of alumina. According to the tax authorities, it had undercharged Aluminium Bahrain B.S.C. by more than USD 420 million over FY 1993–2009, resulting in an assessment of additional taxes of AUD 213 million.

After receiving the assessment, Alcoa filed objections with the Administrative Review Tribunal.

Decision of the Tribunal

The Tribunal allowed Alcoa’s objections and set aside the tax assessment. It found that the commercial terms and context were essential for a CUP analysis and concluded, based on the evidence provided, that Alcoa’s pricing was consistent with, or above, those found in comparable market transactions.

Excerpts
“ 502. As with the prior years, Mr Meurer provided a range of prices (low to high) which in his expert opinion represented arm’s length consideration for the years 2002 to 2009. If these prices are accepted as arm’s length consideration, then it is somewhat remarkable to observe that Alcoa received a price equal to or above what in Mr Meurer’s opinion was arm’s length consideration for the years 2002 and 2007, 2008 and 2009.407 It follows that on the Commissioner’s own evidence, Alcoa did not receive less than arm’s length consideration for those years. It is difficult to understand how the Commissioner pursued a claim with respect to those four years when the opinion of his own expert did not support his case. Mr Meurer’s insistence that the consideration received by Alcoa was nevertheless less than arm’s length consideration because the distribution agreements did not contain price review provisions is, in our view, untenable. Despite some flaws in Mr Meurer’s approach which we identify below, we are prepared to accept his opinion that Alcoa received a price equal to or above arm’s length consideration for the years 2002 and 2007, 2008 and 2009 because it is supported by Alcoa’s experts.”
“509. The relevant test is not whether the Commissioner can establish an arm’s length consideration; it is whether the taxpayer received arm’s length consideration. As the Full Court said in Glencore, “what controls the range of acceptable arm’s length outcomes is the concept of what might reasonably be expected”.420…”
“521. While we have found that Alcoa has not proved it was dealing at arm’s length with the Dahdaleh Entities, it is our view that Alcoa nevertheless received not less than arm’s length consideration in respect of its supply of alumina to the Dahdaleh Entities in 2002 to 2009. “
“DECISION
523. We have concluded that Alcoa has proved the consideration it received for the relevant supplies in each of the Relevant Years is not less than arm’s length consideration. It follows that Alcoa has proved the assessments are excessive and the amounts that should be assessed are the returned amounts based on the actual consideration received by Alcoa.
524. Accordingly, the Tribunal decides to set aside the Commissioner’s objection decision dated 1 April 2022 and substitute it with a decision that each of Alcoa’s objections is allowed in full.”

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