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Transfer Pricing and the Burden of Proof in Australia

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The Federal Court of Australia (FCA) recently decided against the ATO in the case of Commissioner of Taxation v Glencore Investment Pty Ltd (2020). On one issue however – shipping – the Australian Taxation Office (ATO) recorded a win. The FCA agreed with the ATO that the taxpayer had failed to discharge its onus of proof on this issue. So, what is the burden of proof in an Australian transfer pricing case?

The Shipping Issue

The Glencore case involved the sale of copper concentrate from an Australian mine (Cobar) to its Swiss parent, Glencore International, for delivery to customers. Amongst other things, the arrangement allowed for a freight allowance to be agreed annually. In 2009, the parties agreed that this allowance should be fixed at US$60 per outturn wmt, effectively the rate for shipping to India. That cost, however, was considerably greater than the cost of shipping to customers in China, Korea or Japan.

Glencore’s contention was that the ATO view was based on hindsight. The ATO submitted that the taxpayer did not provide any expert testimony or other evidence to demonstrate that the payment of US$60 was at arm’s length.

The FCA observed at 235 that:

(T)he taxpayer led no lay evidence as to why India was chosen. It could, for example, have led evidence of an expectation which existed in early 2009 of a dramatic change in the destination of shipping for that year, with Indian ports predominating for the first time. It did not do this. It could, for example, have led evidence that at the start of each year (Cobar) had no knowledge of where its copper concentrate might be shipped in the months ahead. It did not do this. It could have led expert evidence to support the proposition that the price of US$60 per outturn w.m.t. was a price that independent parties in the position of (Cobar) and (its parent) might reasonably be expected to have agreed in early 2009 to be an appropriate freight allowance. It did not do this.

The FCA found that the taxpayer had failed to discharge its onus of proof on this issue.

Other Issues in Contention

There were several other issues in contention. Essentially, the ATO’s view was that when Cobar entered into a contract with its parent after February 2007 implementing a new pricing formula, it significantly reduced its gross earnings from the sale of copper concentrate and received nothing in return. The ATO also argued that the taxpayer’s industry expert agreed that, based on price forecasts and Cobar’s own budget at the time, it was likely that Cobar was going to be worse off for the 2007 to 2009 years under the new pricing formula.

The taxpayer, according to the ATO, had never demonstrated the benefits that justified giving up so much expected gross revenue. No party acting independently from its parent and at arm’s length would ever have agreed to such detrimental changes.

These submissions raised issues about the arm’s length nature of the arrangement’s so-called price-sharing formula, quotational period optionality and freight allowance. The case also raised legal arguments as to the capacity of the court to restructure a taxpayer’s arrangement and how the court should interpret what Cobar might have done if it were acting independently, taking into account the parties’ perspectives on their commercial risks.

While both the taxpayer and the ATO had industry experts to assist the Court, the FCA agreed with the taxpayer’s expert. The Court found that ATO’s expert view was reasonable, but less convincing than the taxpayer’s expert. The FCA found that the post 2007 arrangement was commercial and prudent (aside from the shipping issue), based on the information available at the time, took into account Cobar as a high cost mine and consistent with what a third party might have done in similar circumstances. The taxpayer met its onus of proof on those issues.

The Burden of Proof

In Australian tax law, the taxpayer bears the burden of proof to the standard of a “balance of probabilities.” This means that one side or the other’s argument must be the more plausible one and is backed by evidence. It isn’t a strict mathematical approach. Therefore, a civil court, considering the balance of probabilities, has considerable leeway in deciding a case.

As a consequence of their burden of proof, taxpayers cannot defend a position in audit, at objection or in the court without positive evidence. In other words, saying nothing is likely to be harmful. Further, the taxpayer’s evidence needs to show that on the balance of probabilities – and against the fiscal’s (tax administration) critique – their pricing is more likely than not to be arm’s length.

Both taxpayers and fiscals need to meet the court’s standard of evidence. This means that the evidence presented should prove the facts, while not violating the rules of evidence against hearsay or opinion (which is especially relevant for transfer pricing experts). Accordingly, both taxpayers and fiscals will seek evidence to test the assertions and suppositions in each other’s positions to determine the relevant facts.

How to Meet the Burden of Proof

At an early stage in risk assessment and audits, fiscals are requiring taxpayers to produce evidence to support their transfer pricing position. Country-by-Country reporting Master file and Local files, as well as required local related party dealings schedules and transfer pricing (TP) documentation, give tax administrations early insights into the evidence supporting a transaction. TP documentation – as well as the facts on which it relies – can demonstrate that the pricing policies and practices meet TP regulations. Board minutes, emails, meeting notes, commercial analysis and other documentation shouldn’t be ignored. Supporting contemporaneous evidence and documentation should therefore be captured using a wide net.

Witness testimony from taxpayers’ key decision-makers in the transaction can also serve as compelling evidence, as seen in Glencore’s success in other aspects of its case, as well as in the SNF and Roche transfer pricing cases.

These key decision-makers are usually the directors and senior management responsible for the relevant transaction or arrangement. These personnel can provide the court with insight into the commercial context and intention of the taxpayer’s pricing, which may not be apparent from the corporate documents. They can provide details regarding other options that were considered and dismissed, and can clarify other evidence. Board minutes, for example, are useful, but could fail to appropriately articulate and provide crucial context for the commercial objectives of the arrangement.

Industry or transfer pricing experts may help establish what might have happened between third parties, but their testimony needs to be supported by directly relevant evidence, such as reliable comparables and TP methods or personal experience with similar transactions. It is also important to note that the Court does not serve as a third expert. it cannot resolve theoretical or other differences between competing experts, as the court generally doesn’t have the expertise to do so.

In a hearing, the court needs to be persuaded that your argument is more plausible based on the available evidence. An Australian civil court will then rule based on their view of the balance of probabilities.


Moussa, E., & Daly, M. (2017). “Three Things You Need to Know About the Burden of Proof,” The Tax Institute. Retrieved from https://www.taxinstitute.com.au.

Commissioner of Taxation v Glencore Investment Pty Ltd (2020) FCAFC 187