On 12 August 2024, a report on pricing of minerals was released by the OECD. The report (Determining the Price of Minerals) is specifically targeted the transfer pricing-framework for pricing of Lithium, but also contains arm’s length principles for pricing of commodities in general.  Abstract “In the mining sector, government revenue depends on mineral products being priced and measured accurately. This can be especially complex for semi-processed minerals such as lithium, which is primarily used for battery production. The schedule presented in this report applies the mineral pricing framework – as documented in the joint OECD/IGF work Determining the Price of Minerals: A Transfer Pricing Framework – to identify the primary economic factors that influence the price of lithium in applying the Comparable Uncontrolled Price method and ensure that developing countries are able to tax lithium exports appropriately.” ...

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 ...

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 ...

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 accurate adjustment cannot be made, the reliability of the CUP method would be reduced, and it might be necessary to select another less direct method instead ...

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 the pricing date specified in any written agreement between the associated enterprises is inconsistent with the actual conduct of the parties or with other facts of the case, tax administrations may determine a different pricing date consistent with those other facts of the case and what independent enterprises would have agreed in comparable circumstances (taking into considerations industry practices). When the taxpayer does not provide reliable evidence of the pricing date agreed by the associated enterprises in the controlled transaction and the tax administration cannot otherwise determine a different pricing date under the guidance in Section D of Chapter I, tax administrations may deem the pricing date for the commodity transaction on the basis of the evidence available to the tax administration; this may be the date of shipment as evidenced by the bill of lading or equivalent document depending on the means of transport. This would mean that the price for the commodities being transacted would be determined by reference to the average quoted price on the shipment date, subject to any appropriate comparability adjustments based on the information available to the tax administration. It would be important to permit resolution of cases of double taxation arising from application of the deemed pricing date through access to the mutual agreement procedure under the applicable Treaty ...

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 ...

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 of the uncontrolled transactions or the conditions determining the quoted price for the commodity that materially affect the price of the commodity transactions being examined, reasonably accurate adjustments should be made to ensure that the economically relevant characteristics of the transactions are comparable. Contributions made in the form of functions performed, assets used and risks assumed by other entities in the supply chain should be compensated in accordance with the guidance provided in these Guidelines ...

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 ...

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 ...

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, in order to validate the decision of the Tax Court, the a quo provided grounds of fact and evidence which, in my opinion, provide sufficient support for the decision, without the appellant’s discrepancies being effective to enable the exceptional remedy sought. Indeed, the Chamber concluded that the products marketed by Nidera S.A. and O.M.H.H.S.A. differ from those exported by the plaintiff, both in their type and in their quantities and markets (countries) of destination and, therefore, they are not suitable to support the adjustment claimed by the tax authorities. In this regard, it explained that, while Nidera S.A. exported to Cuba, Canada, United Kingdom, the Netherlands, Costa Rica, France, Chile and the United States of America, ADM Argentina S.A. exported to the United States of America. In terms of products, it was established that both Nidera S.A. and O.M.H.S.A. traded refined soybean oil in bulk; soybean meal in bulk; refined sunflower oil; sunflower pellets in bulk; crude soybean oil and bread wheat, while in the same fiscal period, ADM Argentina S.A. sold Argentine corn in bulk; Argentine wheat in bulk; bran pellets, soybeans in bulk and sorghum in bulk. Regarding prices, the Chamber stated that it was established that in 76.67% of the transactions concluded by O.M.H.S.A. with independent third parties, the agreed price was closer to the price published by SAGPyA at the date of the agreement than at the date of shipment. It added that, measured in tonnes, 93.56% of O.M.H.H.S.A.’s exports to independent third parties corresponded to transactions concluded on dates on which the quotation price published by SAGPyA on the date of the contract was higher than the price published by the same body on the date of shipment. In these circumstances, it is clear to me that the Treasury’s complaints, aimed at defending its adjustment made on the basis of comparable prices whose use was rejected by both the Tax Court and the Chamber, merely reflect a mere disagreement with the assessment of the evidential material used by the judges in the case, which is not covered by the charge of arbitrariness that the federal remedy alleges (Judgments: 280:320; 295:165; 297:333), whose exceptional nature does not tend to replace the judges when they decide issues that are their own (Judgments: 394:394: 295:356; 297:173), even when an error in the solution of the case is invoked (Judgments: 296:82, 445; 302:1030), reasons for which I think that the extraordinary appeal filed has been rightly denied.” Click here for English Translation Click here for other translation ...

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 ...

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 length range and accordingly the taxpayer has discharged the onus of proof on it.” “In view of my conclusions, the objection decisions should be set aside and the amended assessments for the 2007, 2008 and 2009 income years set aside.“ 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 ...

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 ...

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 Australian entities (“the disputed income”) should also be included in the taxable income of BHP Billiton Ltd under Australian CFC provisions. Whether of not that income should also be included in the taxable income of BHP Billiton Ltd’s depends on whether BHP Billiton Plc’s Australian entities were to be considered “associates” of the Swiss Trading hub. The Australian Tax Office found, that the BHP Billiton Plc’s Australian entities were “associates” of the Swiss Trading hub and included income from those sales of commodities under Australian taxation according to Australian CFC provisions. BHP Billiton Ltd disagreed and filed a complaint over the decision to the Australian Tax Tribunal The Tax Tribunal found in favor of BHP Billiton Ltd. The Australian Tax Office disagreed with this decision an filed an appeal to the Federal Court. The Federal Court issued a split decision in 2019, where the appeal was allowed. BHP Biliton Ltd then appealed this decision to the High Court of Australia. The High Court of Australia dismissed the appeal of BHP Billiton and found in favor of the Australian Tax Office ...

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 another method was considered sufficient to invalidate the tax assessment. The Court of Appeal overruled the decision of the lower court. They concluded that the TNMM method had been applied in violation of paragraph 1 of Article 105.12 of the Russian Tax Code, and further that the method had been applied for the purpose of obtaining an unjustified tax benefits. They found that the CUP method was more appropriate for the case, taking into account the actual circumstances and conditions of the controlled transaction. They ruled in favor of the tax authorities and returned the case for new consideration in the court of first instance. The review panal of the Russian Supreme Court found no grounds (violation of the norms of substantive and procedural law) for bringing the decision before the Supreme Court. Click here for translation ...

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 length range and accordingly the taxpayer has discharged the onus of proof on it.” “In view of my conclusions, the objection decisions should be set aside and the amended assessments for the 2007, 2008 and 2009 income years set aside.“ On October 7 2019 it was announced that the Australian Tax Office will appeal the ruling of the Federal Court ...

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 another method was considered sufficient to invalidate the tax assessment. The Court of Appeal overruled the decision of the lower court. They concluded that the TNMM method had been applied in violation of paragraph 1 of Article 105.12 of the Russian Tax Code, and that the method had been applied for the purpose of obtaining an unjustified tax benefits. They found that the CUP method was more appropriate for the case, taking into account the actual circumstances and conditions of the controlled transaction. They ruled in favor of the tax authorities and returned the case for new consideration in the court of first instance. Click here for translation ...

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 favor of the tax authorities. Click here for translation ...

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 can be broadly grouped into two categories: (1) the sale of minerals and/or mineral rights to related parties; and (2) the purchase or acquisition of various goods, services and assets from related parties. Developing countries require sector-specific expertise to detect and mitigate transfer mispricing in the mining sector. 3. Undervaluation of Mineral Exports Profit shifting via the pricing of mineral products sold to related parties is a major concern for many mineral exporting countries. For developing countries, these risks are elevated where government agencies lack the mineral-testing facilities required to verify the grade and quality of mineral exports, as well as detailed sector-specific knowledge of the mining transformation process and mineral product pricing. 4. Harmfull Tax Incentives Mining and exploration tax incentives are common in developing countries. While tax incentives could encourage expansion of the sector, they may also lead to excess transfers of the gains from countries. It is unrealistic to expect that developing countries will forego incentives entirely due to the pressures of attracting investment. However, it is important that countries understand when tax incentives may be appropriate, how companies are likely to respond to incentives, and the distinction between tax incentives that permanently reduce taxes and from provisions affecting timing impacts. 5. Tax Stabilisation Clauses Fiscal stabilization clauses are problematic from a tax perspective because they can freeze the fiscal terms in the contract such that changes in tax law may not be applicable to existing mines, foregoing significant government revenue. 6. International Tax Treaties Developing countries consistently raise concerns about tax treaty abuse. Countries with abundant mineral resources need particular assistance in this area, considering how treaty provisions might have a significant impact on taxes imposed on the mining sector. 7. Offshore Indirect Transfers of Mining Assets Transfers of ownership of company assets (or the companies themselves) can generate significant income, which many countries seek to tax as capital gains. Transactions may be structured to fall outside the mining country’s tax base by selling shares in an offshore company holding the asset, without notifying tax authorities in the country where the asset/company is located. 8. Metals Streaming Metals streaming involves mining companies selling a certain percentage of their production at a fixed cost to a financier in return for funds for partial or complete mine development and construction. Since the amount of financing provided is linked to the discounted mineral price, companies have strong incentives to agree to lower fixed prices to increase the up-front finance available. Streaming reduces the tax base of resource-producing countries, where royalties and income tax use sales revenue as part of calculations. There is virtually no guidance on these arrangements in the mining tax literature. 9. Abusive Hedging Arrangements Hedging is a legitimate business practice in many commodity markets. It consists of locking in a future-selling price in order for both parties to the transaction to plan their commercial operations with predictability. A problem arises when companies engage in abusive hedging with related parties. They use hedging contracts to set an artificially low sale price for production and therefore record systematic hedging losses, reducing their taxable income. 10. Inadequate Ring-Fencing It is possible that mining companies will have multiple activities within a country, creating opportunities to use losses incurred in one project (e.g., during exploration for a new mine), to offset profits earned in another project, thereby delaying payment of corporate income tax. Ring-fencing is one way of limiting income consolidation for tax purposes; however, getting the design right is critical to securing tax revenues while attracting further investment. The following reports adresses some of these issues: Limiting the impact of Excessive Interest Deductions on Mining Revenue Tax incentives in Mining: Minimising risk to Revenue Comparables Data for Transfer Pricing Analyses – Prices of Minerals Sold in an Intermediate Form Toolkit for Transfer Pricing Risk Assessment in the African Mining Industry Transfer Pricing Cases in Mining and Commodity Case NameDescriptionDateCourtCatagoriesKeywords ...

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 “the method applied by the taxpayer, based on the conditions of the controlled transaction, did not allow determining the comparability with the conditions of comparable transactions between non-related parties”. Click here for other translation ...

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 the tax authority’s position that Uralkali Trading SA had purchased products at an artificially low price from Uralkaliy PAO and resold them at a large mark-up. The court also identified significant flaws in the tax authority’s application of the CUP method. Had the Swiss trader, Uralkali Trading SA, used the prices sugested by the tax authorities it would not have been able to cover even “direct business costs” and thus been loss-making. The tax authority had wrongfully compared the taxpayer’s prices in transactions with Uralkali Trading SA with that same taxpayer’s prices after the addition of another trader’s margin. The data published by the Argus price reporting agency had been used without properly analysing the transactions on which the price quotations were based and without adjusting for significant differences in comparability factors – volumes, period , and payment terms. For these reasons, the tax authority’s decision was ruled invalid. Click here for translation ...

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 ...

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 ...

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 accurate adjustment cannot be made, the reliability of the CUP method would be reduced, and it might be necessary to select another less direct method instead ...

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 the pricing date specified in any written agreement between the associated enterprises is inconsistent with the actual conduct of the parties or with other facts of the case, tax administrations may determine a different pricing date consistent with those other facts of the case and what independent enterprises would have agreed in comparable circumstances (taking into considerations industry practices). When the taxpayer does not provide reliable evidence of the pricing date agreed by the associated enterprises in the controlled transaction and the tax administration cannot otherwise determine a different pricing date under the guidance in Section D of Chapter I, tax administrations may deem the pricing date for the commodity transaction on the basis of the evidence available to the tax administration; this may be the date of shipment as evidenced by the bill of lading or equivalent document depending on the means of transport. This would mean that the price for the commodities being transacted would be determined by reference to the average quoted price on the shipment date, subject to any appropriate comparability adjustments based on the information available to the tax administration. It would be important to permit resolution of cases of double taxation arising from application of the deemed pricing date through access to the mutual agreement procedure under the applicable Treaty ...

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 ...

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 of the uncontrolled transactions or the conditions determining the quoted price for the commodity that materially affect the price of the commodity transactions being examined, reasonably accurate adjustments should be made to ensure that the economically relevant characteristics of the transactions are comparable. Contributions made in the form of functions performed, assets used and risks assumed by other entities in the supply chain should be compensated in accordance with the guidance provided in these Guidelines ...

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 ...

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 ...

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 differential was determined. In the tax assessment, the tax authorities used the same quotation for comparison in the pricing of the transactions, but adjusted for ESPO M1 differential (added the minimum premium), which was determined at the date closest to the signing of the contract addendum. The court ruled in favor of the Russian tax authorities. In the judgement the court pointed to the fact that there was no transfer pricing documentation supporting the pricing of the transaction as an argument in favor of the transfer pricing method used by the Russian tax authorities. The court did not accept the company’s arguments that the Hong Kong trader was an unrelated party. Counteragents registered in offshore zones are to be treated as related parties according to Russian legislation. Click here for translation ...

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 ...

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 ...

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 ...

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 general lacks support in the preparatory work, nor can it be justified in the light of the purpose of the legislation, which is to prevent unauthorized transfers of profits abroad. Where the controlled parties have continuous business transactions with each other, it is more aligned with the purpose of the legislation to focus on the more long-term effects of the bases and methods of pricing applied during the period under review. This means that “overprices” and “underprices” that have occurred within the same tax year should normally be offset against each other. According to the Court, it is therefore often necessary to make an overall assessment of the Swedish and foreign company’s business transactions with each other. The Court also concluded that it is sometimes possible to deviate from the principle of separate tax year’s when applying the arm’s length provisions. A pricing system that in a longer perspective is fully acceptable from an arm’s point of view can lead to overcharging in one year and undercharging in another year. It can also lead to costs in the form of premiums for a number of years leading to higher incomes or losses at a later stage. For a period of three years, Swedish Shell had applied one and the same business strategy with regard to its oil purchases. The strategy was considered justified for business reasons, which meant that the results during two of the tax years were taken into account in the assessment of the results in the third year. The price method used in the case was the market price method (CUP). This method was chosen as no material had been presented that could form the basis for using any of the other methods. The price test and choice of method had to be made in the light of the information available on the price conditions in the crude oil and freight markets. The Court stated that a market comparison presupposed that the contractual conditions and the market situation could be established. The sale of crude oil from SIPC to Svenska Shell had taken place on CIF terms (cost, insurance and freight) in the sense that SIPC had been responsible for shipping and insurance of the oil sold. It could have been worthwhile, the Court held, to base the arm’s length test on a comparison between that total price and the CIF prices which occurred in similar transactions on the market between independent parties. However, there was no investigation of such CIF prices and in fact it was the case that SIPC’s and Svenska Shell’s contractual relations in significant parts had no direct equivalent on the market during the relevant time period. Even though the sale of crude oil had taken place on CIF terms, the contractual relationship between Svenska Shell and SIPC had contained separate agreements on the pricing of crude oil and shipping. As a result of these agreements, prices of oil were more similar to FOB (free on board) prices and the prices of freight could be linked to standards that directly or indirectly reflected market prices. A separate price comparison of oil and shipping was therefore possible. According to the Court, there were also other reasons for making such a separate assessment of the prices, since the fundamental problems that arose during the arm’s length examination in the two areas differed in significant respects. Swedish Shell claimed that SIPC had the function of an independent trader and therefore took out a certain trading margin on crude oil sales. The Swedish Tax Agency claimed that SIPC was only a group-wide service body and therefore not entitled to any profit margin at all. However, the Swedish Tax Agency accepted a certain remuneration for the services provided by SIPC. The Court found that SIPC had borne certain risks in its purchasing and sales activities and that these risks were such that a certain trading profit was justified. To assess the trading margin when pricing crude oil, different types of list prices were used as a comparison. Some of these list prices contained a certain trading margin that amounted to different levels. The Court found that it was not possible to determine any general levels for the size of the trading margin based on the material. An acceptable margin therefore had to be estimated in the individual case. The Court did not find it clear that the trading margin taken by SIPC on crude oil exceeded the level that would have been agreed between independent parties. When it came to the pricing of crude oil, different price types were used based on price quotations in different markets. The Court assessed the extent to which the different price types could be used for purpose of pricing the controlled transaction. One of the price types used was the US list prices. These were average prices that the US tax authorities produced as comparative prices for one year at a time. The list consisted of a large number of sales worldwide. The Court found that these list prices were based on a ...