Australian domestic tax law contains transfer pricing provisions the broad purpose of which is to prevent Australian taxpayers shifting profits offshore. In broad terms these provisions are engaged if in relation to an international contract, the prices paid by the taxpayer to the suppliers exceed the consideration which might reasonably be expected to have been paid if the transactions had occurred between independent parties dealing at arm’s length i.e. whether or not “arm’s length consideration” has been paid.
The Full Bench of the Federal Court upheld the decision at first instance that there was an “arm’s length consideration” between the parties and therefore the transfer pricing provisions were not enlivened. At first instance the judge held that once way of determining the arm’s length consideration is to find truly comparable transactions involving the acquisition of the same or sufficiently similar products in the same or similar circumstances, where those transactions are undertaken at arm’s length, or if not taken at arm’s length, where suitable adjustment can be made to determine the arm’s length consideration that would have taken place if the acquisition was at arm’s length. The Full Bench said that this approach was correct and consistent with the application of the OECD Model Tax Convention and commentary. The provisions also do not mean that there is necessarily a single arm’s length consideration. Where there is more than one arm’s length price (as often there will be), the Commissioner may determine which he arm’s length price he will apply. However, correspondingly, the taxpayer will be entitled to succeed if it shows that the prices paid by it were arm’s length prices or less than arm’s length prices. There is no need for the taxpayer to establish a particular price as the arm’s length price. It will be sufficient for the taxpayer to show that it paid less than an arm’s length price.
In this case the taxpayer had proved that the prices paid by it were less than the prices paid by independent comparable purchasers and that these prices were arm’s length prices. Therefore the taxpayer’s prices did not exceed arm’s length consideration.