As another example, assume a taxpayer sells 1000 tons of a product for $80 per ton to an associated enterprise in its MNE group, and at the same time sells 500 tons of the same product for $100 per ton to an independent enterprise. This case requires an evaluation of whether the different volumes should result in an adjustment of the transfer price. The relevant market should be researched by analysing transactions in similar products to determine typical volume discounts ... Read more

One illustrative case where adjustments may be required is where the circumstances surrounding controlled and uncontrolled sales are identical, except for the fact that the controlled sales price is a delivered price and the uncontrolled sales are made f.o.b. factory. The differences in terms of transportation and insurance generally have a definite and reasonably ascertainable effect on price. Therefore, to determine the uncontrolled sales price, adjustment should be made to the price for the difference in delivery terms ... Read more

The CUP method is a particularly reliable method where an independent enterprise sells the same product as is sold between two associated enterprises. For example, an independent enterprise sells unbranded Colombian coffee beans of a similar type, quality, and quantity as those sold between two associated enterprises, assuming that the controlled and uncontrolled transactions occur at about the same time, at the same stage in the production/distribution chain, and under similar conditions. If the only available uncontrolled transaction involved unbranded Brazilian coffee beans, it would be appropriate to inquire whether the difference in the coffee beans has a material effect on the price. For example, it could be asked whether the source of coffee beans commands a premium or requires a discount generally in the open market. Such information may be obtainable from commodity markets or may be deduced from dealer prices. If this difference does have a material effect on price, some adjustments would be appropriate. If a reasonably ... Read more

A particularly relevant factor for commodity transactions determined by reference to the quoted price is the pricing date, which refers to the specific time, date or time period (e.g. a specified range of dates over which an average price is determined) selected by the parties to determine the price for commodity transactions. Where the taxpayer can provide reliable evidence of the pricing date agreed by the associated enterprises in the controlled commodity transaction at the time the transaction was entered into (e.g. proposals and acceptances, contracts or registered contracts, or other documents setting out the terms of the arrangements may constitute reliable evidence) and this is consistent with the actual conduct of the parties or with other facts of the case, in accordance with the guidance in Section D of Chapter I on accurately delineating the actual transaction, tax administrations should determine the price for the commodity transaction by reference to the pricing date agreed by the associated enterprises. If ... Read more

In order to assist tax administrations in conducting an informed examination of the taxpayer’s transfer pricing practices, taxpayers should provide reliable evidence and document, as part of their transfer pricing documentation, the price-setting policy for commodity transactions, the information needed to justify price adjustments based on the comparable uncontrolled transactions or comparable uncontrolled arrangements represented by the quoted price and any other relevant information, such as pricing formulas used, third party end-customer agreements, premia or discounts applied, pricing date, supply chain information, and information prepared for non-tax purposes ... Read more

For the CUP method to be reliably applied to commodity transactions, the economically relevant characteristics of the controlled transaction and the uncontrolled transactions or the uncontrolled arrangements represented by the quoted price need to be comparable. For commodities, the economically relevant characteristics include, among others, the physical features and quality of the commodity; the contractual terms of the controlled transaction, such as volumes traded, period of the arrangements, the timing and terms of delivery, transportation, insurance, and foreign currency terms. For some commodities, certain economically relevant characteristics (e.g. prompt delivery) may lead to a premium or a discount. If the quoted price is used as a reference for determining the arm’s length price or price range, the standardised contracts which stipulate specifications on the basis of which commodities are traded on the exchange and which result in a quoted price for the commodity may be relevant. Where there are differences between the conditions of the controlled transaction and the conditions ... Read more

Under the CUP method, the arm’s length price for commodity transactions may be determined by reference to comparable uncontrolled transactions and by reference to comparable uncontrolled arrangements represented by the quoted price. Quoted commodity prices generally reflect the agreement between independent buyers and sellers in the market on the price for a specific type and amount of commodity, traded under specific conditions at a certain point in time. A relevant factor in determining the appropriateness of using the quoted price for a specific commodity is the extent to which the quoted price is widely and routinely used in the ordinary course of business in the industry to negotiate prices for uncontrolled transactions comparable to the controlled transaction. Accordingly, depending on the facts and circumstances of each case, quoted prices can be considered as a reference for pricing commodity transactions between associated enterprises. Taxpayers and tax administrations should be consistent in their application of the appropriately selected quoted price ... Read more

Subject to the guidance in paragraph 2.2 for selecting the most appropriate transfer pricing method in the circumstances of a particular case, the CUP method would generally be an appropriate transfer pricing method for establishing the arm’s length price for the transfer of commodities between associated enterprises. The reference to “commodities” shall be understood to encompass physical products for which a quoted price is used as a reference by independent parties in the industry to set prices in uncontrolled transactions. The term “quoted price” refers to the price of the commodity in the relevant period obtained in an international or domestic commodity exchange market. In this context, a quoted price also includes prices obtained from recognised and transparent price reporting or statistical agencies, or from governmental price-setting agencies, where such indexes are used as a reference by unrelated parties to determine prices in transactions between them ... Read more

The tax authorities had adjusted the agreed prices of agricultural commodities transferred by ADM Argentina to a foreign related party. Following receipt of the additional income assessment, ADM Argentina appealed to the Federal Tax Court. The Federal Tax Court overturned the assessment. The court concluded that the adjustments made by the tax authorities were arbitrary because they were made only in respect of certain export transactions where the quoted price at the time of the transaction was lower than the quoted price at the time the goods were loaded. Furthermore, the transactions used by the tax authorities as external comparables were not valid for transfer pricing purposes because they suffered from significant comparability flaws and deficiencies. The Court of Appeal later upheld the Federal Tax Court’s decision and the Supreme Court dismissed a final appeal by the tax authorities. Excerpts “On the basis of these premises, I consider that the extraordinary appeal is inadmissible and has been properly denied since, ... Read more

Glencore Australia (CMPL) sold copper concentrate produced in Australia to its Swiss parent, Glencore International AG (GIAG). The tax authorities found, that the price paid by Glencore International AG to Glencore Australia for the copper concentrate in the relevant years according to a price sharing agreement was less than the price that might reasonably be expected to have been paid in an arm’s length dealing between independent parties. The tax assessment was brought to court by Glencore. The Federal Court of Australia found in favor of Glencore. The ruling of the Federal Court was appealed by the Australian tax authorities. On 6 November 2020, a Full Federal Court in a 3-0 ruling dismissed the appeal of the tax authorities. The tax authorities then submitted a application for special leave to the High Court. This application was dismissed by the Court in a judgement issued 20. May 2021. Click here for translation ... Read more

Glencore Australia (CMPL) sold copper concentrate produced in Australia to its Swiss parent, Glencore International AG (GIAG). The tax administration found, that the price paid by Glencore International AG to Glencore Australia for the copper concentrate in the relevant years according to a price sharing agreement was less than the price that might reasonably be expected to have been paid in an arm’s length dealing between independent parties. ‘The amended assessments included in the taxpayer’s assessable income additional amounts of $49,156,382 (2007), $83,228,784 (2008) and $108,675,756 (2009) referable to the consideration which the Commissioner considered would constitute an arm’s length payment for the copper concentrate sold to Glencore International AG in each of the relevant years. The Federal Court of Australia found in favor of Glencore. “Accordingly I find that the taxpayer has established that the prices that CMPL was paid by GIAG for the copper concentrate it supplied to GIAG under the February 2007 Agreement were within an arm’s ... Read more

In March 2020 the Australian Taxation Office issued an tax assessment regarding transfer pricing to Rio Tinto’s aluminium division according to which additional taxes in an amount of $86.1 million must be paid for fiscal years 2010 – 2016. According to the assessment Rio’s Australian subsidiaries did not charge an arm’s length price for the aluminium they sold to Rio’s Singapore marketing hub. This new aluminum case is separate to Rio’s long-running $447 million dispute with the ATO over the transfer pricing of Australian iron ore. Rio intents to object to the ATO’s aluminium claim and states that the pricing of iron ore and aluminium has been determined in accordance with the OECD guidelines and Australian and Singapore domestic tax laws ... Read more

BHP Billiton Ltd, an Australian resident taxpayer, is part of a dual-listed company arrangement (“the DLC Arrangement”) with BHP Billiton Plc (“Plc”). BHP Billiton Marketing AG is a Swiss trading hub in the group which, during the relevant years, was a controlled foreign company (CFC) of BHP Billiton Ltd because BHP Billiton Ltd indirectly held 58 per cent of the shares in the Swiss trading hub. BHP Billiton Plc indirectly held the remaning 42 per cent. The Swiss trading hub purchased commodities from both BHP Billiton Ltd’s Australian subsidiaries and BHP Billiton Plc’s Australian entities and derived income from sale of these commodities into the export market. There was no dispute that BHP Billiton Marketing AG’s income from the sale of commodities purchased from BHP Billiton Ltd’s Australian subsidiaries was “tainted sales income” to be included in the assessable income of BHP Billiton Ltd under Australian CFC provisions. The question was whether sale of commodities purchased from BHP Billiton Plc’s ... Read more

PJSC Uralkali, produced and sold fertilizers (“potassium chloride”) through a related Swiss trader. Uralkali had informed the authorities about the controlled transaction and submitted the required TP documentation. To substantiate the pricing of the transaction they had applied the transactional net margin method (TNMM) with the Swiss trader as the tested party. The Russian tax authorities disapproved of the choice of method and the way the method had been applied. They conducted an analysis, using the CUP method, and determined the the prices used in the controlled transaction deviated from price quotations of an independent pricing agency (Argus). Hence a tax assessment was issued. PJSC Uralkali disapproved of the assessment and brought the case to court. The court of first instance supported Uralkali’s position, and argued that the tax authority should have applied the same TP method as the Taxpayer. Failure of the tax authority to apply the same TP method or to provide sufficient evidence to justify use of ... Read more

Glencore Australia (CMPL) sold copper concentrate produced in Australia to its Swiss parent, Glencore International AG (GIAG). The tax administration found, that the price paid by Glencore International AG to Glencore Australia for the copper concentrate in the relevant years according to a price sharing agreement was less than the price that might reasonably be expected to have been paid in an arm’s length dealing between independent parties. ‘The amended assessments included in the taxpayer’s assessable income additional amounts of $49,156,382 (2007), $83,228,784 (2008) and $108,675,756 (2009) referrable to the consideration which the Commissioner considered would constitute an arm’s length payment for the copper concentrate sold to Glencore International AG in each of the relevant years. The Federal Court of Australia found in favor of Glencore. “Accordingly I find that the taxpayer has established that the prices that CMPL was paid by GIAG for the copper concentrate it supplied to GIAG under the February 2007 Agreement were within an arm’s ... Read more

PJSC Uralkali, produced and sold fertilizers (“potassium chloride”) through a related Swiss trader. Uralkali had informed the authorities about the controlled transaction and submitted the required TP documentation. To substantiate the pricing of the transaction they had applied the transactional net margin method (TNMM) with the Swiss trader as the tested party. The Russian tax authorities disapproved of the choice of method and the way the method had been applied. They conducted an analysis, using the CUP method, and determined the the prices used in the controlled transaction deviated from price quotations of an independent pricing agency (Argus). Hence a tax assessment was issued. PJSC Uralkali disapproved of the assessment and brought the case to court. The court of first instance supported Uralkali’s position, and argued that the tax authority should have applied the same TP method as the Taxpayer. Failure of the tax authority to apply the same TP method or to provide sufficient evidence to justify use of ... Read more

In 2014, RIF Trading House sourced and bought agricultural products in Russia – wheat, barley, corn and peas. These products were then exported to a trader in the UAE, which turned out to be related to RIF Trading House. However, RIF Trading House had not provide information on the relationship, nor the required transfer pricing documentation on the controlled transactions. Following an audit, the Russian Federal Tax Service came to the conclusion that the export prices had been lowered in the supply of products to the trader in UAE. The Russian Federal Tax Service independently conducted a transfer pricing analysis – functional analysis, analyzed the market, commodity exchange prices (Platts, ICAR) etc., and then issued a tax assessment where combinations of pricing methods and adjustments had been applied to determine the pricing of the controlled transactions and thus the income of RIF Trading House. Disagreeing with the assessment RIF Trading House brought the case to Court. The court ruled in ... Read more

Like other sectors of the economy, there are base erosion and profit shifting risks in the mining sector. Based on the ongoing work on BEPS, the IGF (Intergovernmental Forum on Mining) and OECD has released guidance for source countries on transfer pricing in the mining sector. The transfer pricing and tax avoidance issues identified in the sector are: 1. Excessive Interest Deductions Companies may use related-party debt to shift profit offshore via excessive interest payments to related entities. “Debt shifting” is not unique to mining, but it is particularly significant for mining projects that require high levels of capital investment not directly obtainable from third parties, making substantial related-party borrowing a frequent practice. 2. Abusive Transfer Pricing Transfer pricing occurs when one company sells a good or service to another related company. Because these transactions are internal, they are not subject to market pricing and can be used by multinationals to shift profits to low-tax jurisdictions. Related-party transactions in mining ... Read more

A Russian company, Togliattiazot, supplied ammonia to the external market through a Swiss trading hub, Nitrochem Distribution AG. The tax authority found that the selling price of the ammonia to Nitrochem Distribution AG had not been determined by Togliattiazot in accordance with the arm’s length principle but had been to low. Hence, a transfer pricing assessment was issued where the CUP method was applied. At first, the company argued that Togliattiazot and Nitrochem Distribution AG were not even affiliates. Later, the company argued that transfer prices had been determined in accordance with the TNM-method. The court ruled in favor of the Russian tax authority. Based on information gathered by the tax authorities – SPARK-Interfax and Orbis Bureau Van Djik bases, Switzerland’s trade register, Internet sites, and e-mail correspondence etc – the tax authorities were able to prove in court, the presence of actual control between Togliattiazot and Nitrochem. The TNMM method applied by Togliattiazot was rejected by the court because ... Read more

A Russian company, Uralkaliy PAO, sold potassium chloride to a related trading company in Switzerland , Uralkali Trading SA. Following an audit, the Russian tax authority concluded that Uralkaliy PAO had set the prices at an artificially low level. A decision was therefore issued, ordering the taxpayer to pay an additional tax of 980 million roubles and a penalty of 3 million roubles. Uralkaly PAO had used the transactional net margin method (TNMM). The reasons given for not using the CUP method was that no publicly accessible sources of information on comparable transactions between independent parties existed. The range of return on sales for 2012 under the TNMM was 1.83% – 5.59%, while Uralkali Trading SA’s actual profit margin was 1.81%. The court supported the taxpayer’s choice of pricing method (TNMM), and since the Swiss trader’s actual profit margin did not exceed the upper limit of the range, it was concluded that the controlled transactions were priced at arm’s length.  The court rejected ... Read more

As another example, assume a taxpayer sells 1000 tons of a product for $80 per ton to an associated enterprise in its MNE group, and at the same time sells 500 tons of the same product for $100 per ton to an independent enterprise. This case requires an evaluation of whether the different volumes should result in an adjustment of the transfer price. The relevant market should be researched by analysing transactions in similar products to determine typical volume discounts ... Read more

One illustrative case where adjustments may be required is where the circumstances surrounding controlled and uncontrolled sales are identical, except for the fact that the controlled sales price is a delivered price and the uncontrolled sales are made f.o.b. factory. The differences in terms of transportation and insurance generally have a definite and reasonably ascertainable effect on price. Therefore, to determine the uncontrolled sales price, adjustment should be made to the price for the difference in delivery terms ... Read more

The CUP method is a particularly reliable method where an independent enterprise sells the same product as is sold between two associated enterprises. For example, an independent enterprise sells unbranded Colombian coffee beans of a similar type, quality, and quantity as those sold between two associated enterprises, assuming that the controlled and uncontrolled transactions occur at about the same time, at the same stage in the production/distribution chain, and under similar conditions. If the only available uncontrolled transaction involved unbranded Brazilian coffee beans, it would be appropriate to inquire whether the difference in the coffee beans has a material effect on the price. For example, it could be asked whether the source of coffee beans commands a premium or requires a discount generally in the open market. Such information may be obtainable from commodity markets or may be deduced from dealer prices. If this difference does have a material effect on price, some adjustments would be appropriate. If a reasonably ... Read more

A particularly relevant factor for commodity transactions determined by reference to the quoted price is the pricing date, which refers to the specific time, date or time period (e.g. a specified range of dates over which an average price is determined) selected by the parties to determine the price for commodity transactions. Where the taxpayer can provide reliable evidence of the pricing date agreed by the associated enterprises in the controlled commodity transaction at the time the transaction was entered into (e.g. proposals and acceptances, contracts or registered contracts, or other documents setting out the terms of the arrangements may constitute reliable evidence) and this is consistent with the actual conduct of the parties or with other facts of the case, in accordance with the guidance in Section D of Chapter I on accurately delineating the actual transaction, tax administrations should determine the price for the commodity transaction by reference to the pricing date agreed by the associated enterprises. If ... Read more

In order to assist tax administrations in conducting an informed examination of the taxpayer’s transfer pricing practices, taxpayers should provide reliable evidence and document, as part of their transfer pricing documentation, the price-setting policy for commodity transactions, the information needed to justify price adjustments based on the comparable uncontrolled transactions or comparable uncontrolled arrangements represented by the quoted price and any other relevant information, such as pricing formulas used, third party end-customer agreements, premia or discounts applied, pricing date, supply chain information, and information prepared for non-tax purposes ... Read more

For the CUP method to be reliably applied to commodity transactions, the economically relevant characteristics of the controlled transaction and the uncontrolled transactions or the uncontrolled arrangements represented by the quoted price need to be comparable. For commodities, the economically relevant characteristics include, among others, the physical features and quality of the commodity; the contractual terms of the controlled transaction, such as volumes traded, period of the arrangements, the timing and terms of delivery, transportation, insurance, and foreign currency terms. For some commodities, certain economically relevant characteristics (e.g. prompt delivery) may lead to a premium or a discount. If the quoted price is used as a reference for determining the arm’s length price or price range, the standardised contracts which stipulate specifications on the basis of which commodities are traded on the exchange and which result in a quoted price for the commodity may be relevant. Where there are differences between the conditions of the controlled transaction and the conditions ... Read more

Under the CUP method, the arm’s length price for commodity transactions may be determined by reference to comparable uncontrolled transactions and by reference to comparable uncontrolled arrangements represented by the quoted price. Quoted commodity prices generally reflect the agreement between independent buyers and sellers in the market on the price for a specific type and amount of commodity, traded under specific conditions at a certain point in time. A relevant factor in determining the appropriateness of using the quoted price for a specific commodity is the extent to which the quoted price is widely and routinely used in the ordinary course of business in the industry to negotiate prices for uncontrolled transactions comparable to the controlled transaction. Accordingly, depending on the facts and circumstances of each case, quoted prices can be considered as a reference for pricing commodity transactions between associated enterprises. Taxpayers and tax administrations should be consistent in their application of the appropriately selected quoted price ... Read more

Subject to the guidance in paragraph 2.2 for selecting the most appropriate transfer pricing method in the circumstances of a particular case, the CUP method would generally be an appropriate transfer pricing method for establishing the arm’s length price for the transfer of commodities between associated enterprises. The reference to “commodities” shall be understood to encompass physical products for which a quoted price is used as a reference by independent parties in the industry to set prices in uncontrolled transactions. The term “quoted price” refers to the price of the commodity in the relevant period obtained in an international or domestic commodity exchange market. In this context, a quoted price also includes prices obtained from recognised and transparent price reporting or statistical agencies, or from governmental price-setting agencies, where such indexes are used as a reference by unrelated parties to determine prices in transactions between them ... Read more

This case relates to sales of crude oil from the Russian company, Dulisma Oil,  to an unrelated trading company, Concept Oil Ltd, registered in Hong Kong. The Russian tax authorities found that the price at which oil was sold deviated from quotations published by the Platts price reporting agency. They found that the prices for particular deliveries had been lower than the arm’s length price and issued a tax assessment and penalties of RUB 177 million. Dulisma Oil had set the prices using quotations published by Platts, which is a common practice in crude oil trading. The contract price was determined as the mean of average quotations for Dubai crude on publication days agreed upon by the parties, minus a differential determined before the delivery date “on the basis of the situation prevailing on the market”. Transfer pricing documentation had not been prepared, and the company also failed to explain the method by which the price had been calculated and how the price ... Read more

In 2012, ZAO NK Dulisma, a Russian oil and gas company, sold crude oil via an unrelated Hong Kong-based trader. In Russia, transactions with unrelated parties may be deemed controlled transactions for Transfer Pricing purposes, provided certain conditions are met. The Russian Tax Authorities audited the transactions with the Hong Kong trader and found that the price had been understated. The arm’s length price was determined using a CUP method, based on data from Platts quote for Dubai grade oil, adjusted for quality and terms of delivery etc. The court ruled in favor of the tax authorities, confirming that the application of the CUP method and the use of Platts data was justified. Click here for translation ... Read more

A Japanese distributor “Banana Corp” imported Ecuadorian bananas from a group company for wholesale in Japan. The Japanese tax administration ruled that the amount of consideration paid by Japanese distributor had exceeded the arm’s length price and issued an assessment of additional tax and penalties for FY 1999 – 2004. At first Banana Corp brought the case before the regional court who decision in favour of the tax administration. Banana Corp appealed this decision to Tokyo High Court. Tokyo High Court dismissed the appeal and upheld the decision of the regional court. Click here for English Translation Click here for other translation ... Read more

The “Banana Group” is based in Ecuador and is engaged in the business of exporting Ecuadorian bananas. The Japanese distributor was part of the Banana Group. An Ecuadorian group company purchases bananas produced on plantations in Ecuador, exports and sells them to another intermediate group company, who in turn sells them to the Japanese distributor for wholesale in Japan. At issue was the arms length price of the bananas imported by the Japanese distributor. The tax administration held that the price paid for the bananas had been to high and issued an assessment for FY 1999-2004. The Japanese company disagreed and brought the case to court. Decision of the Court The Tokyo District court decided in favour of the tax administration and upheld the tax assessment. Click here for English translation Click here for other translation ... Read more

Svenske Shell AB imported crude oil from its UK sister company SIPC over a five-year period. Imports included the purchase and shipping of crude oil to the port of Gothenburg i Sweden from different parts of the world. The price of the oil was based on a framework agreement entered into between the parties, while the freight was calculated based on templates with no direct connection to the actual individual transport. The tax authorities considered that the pricing in both parts was incorrect and therefore partially refused deduction of the costs of oil imports. The assessment (and the later judgement of the Supreme Administrative Court) was based on the wording of the former Swedish “arm’s length” provision dating back to 1965. Decision of Court The Court did not consider that a price deviation has been sufficiently established where the applied price of only a single transaction deviates from the market price. Applying such a narrow view on price comparisons in ... Read more