Press Room

3 Oct 2019

Transfer pricing update

Transfer pricing cases are like hen’s teeth – very rare. So to have two significant cases within the space of a month is something of a miracle.

Australia – Glencore

On 3 September 2019, the Federal Court of Australia handed down its decision in Glencore Investment Pty Ltd v Commissioner of Taxation of the Commonwealth of Australia [2019] FCA 1432.

In ruling for Glencore the Court set aside amended assessments totalling AUD 243mn plus AUD 20mn interest for the years 2007, 2008 and 2009.


CMPL, the Australian subsidiary of Glencore entered into offtake agreements with GIAG, its Swiss parent in 1999. These agreements were renegotiated in 2007 resulting in a different pricing structure that the ATO found not to be at arm’s length (i.e. that a third party in CMPL’s position would not have agreed to the revised pricing). Interestingly, CMPL adduced evidence that the terms were in fact similar to contracts between independent third parties. Notwithstanding this, the ATO argued that an uncontrolled third party would have stuck to the 1999 contract and only agreed to renegotiate certain limited terms (citing the recent Chevron case as authority). Unsurprisingly, CMPL’s position was that the parties had in fact agreed revised terms and that there was no basis to assume they had agreed something other than that.


The Court considered two related points:

    1. whether the ATO could restructure the contract as a market-related contract for the purposes of applying transfer pricing provisions; and
    2. whether the pricing under the revised agreements were within an arm’s length range.


The Court rejected the ATO’s position that Chevron allowed them to recharacterize the terms of the 2007 agreements. In addition, the Court held:

    1. that the commercial prudence of a transaction is outwith the transfer pricing rules, the focus being a comparative analysis of the consideration given under the actual agreement with a comparable “real world” arm’s length consideration;
    2. that purpose or motive does not form part of the arm’s length principle; and
    3. even if the commercial considerations were to be considered, hindsight cannot be used to assume commercial judgement made at the time the transfer pricing methodology was adopted.

Finally, and to add insult to injury, the Court further found that the consideration under the revised agreements was within an arm’s length range based on evidence provided by CMPL.

One might wish that the Supreme Court here in the UK was similarly sensible as the Australian court…

The Netherlands / EC / State Aid / Starbucks

On 24 September 2019, the General Court of the EU (the Court) published its decision with respect to the claim brought by the European Commission (EC) that the Netherlands had granted to Starbucks a tax advantage that amount to state.  The facts of the Starbucks case are well known but worth briefly summarising.


In 2008, the Netherlands tax authorities agreed an advance pricing arrangement (APA) with Starbucks Manufacturing EMEA BV (SMBV) which might colloquially be referred to as a “roaster” (because it roasts green coffee beans turning them brown). In addition to roasting, SMBV also distributed the roasted beans within the Starbucks group in the EMEA region.

The EC found that the APA allowed SMBV to artificially reduce its Dutch taxable profits as a result of two payments:

    1. highly inflated” price for green coffee beans to a Swiss group entity; and
    2. a royalty to a UK group entity for coffee-roasting know-how.

How much know-how is there in roasting and what price should be paid for this service were issues the Court had to consider when asking themselves whether the arrangements amounted to state aid.


The Court held that the use by the EC of the arm’s length principle was a legitimate exercise of its powers (Art.107 TFEU). However, the EC failed to:

    1. prove that the transactional net margin method (TNMM) which was used by the APA to determine the arm’s length price for the service rendered resulted in a lower tax burden:
    2. demonstrate that the royalty rate payable should have been zero; and
    3. the price paid for the green beans resulted in a tax advantage.

The Court therefore annulled the EC’s decision because it had failed to demonstrate that the APA derogated from the general corporate system and did not provide Starbucks with an economic advantage within the meaning of Art.107.

Whether the Commission appeals the decision remains to be seen. It has a little over two months in which to do so. Our money is on an appeal – at the end of the day it’s only the taxpayer footing the bill.

Andrew Parkes

Andrew is a highly experienced international tax specialist who worked at a senior level in HMRC’s international teams for over 10 years. He has a wealth of experience and technical knowledge.

Email: Andrew Parkes