Tribunal upholds taxpayer appeal in transfer pricing case

An appeal by an aluminium company has been allowed in full by the Administrative Review Tribunal of Australia in the recent decision, Alcoa of Australia Ltd and Commissioner of Taxation (Taxation and business) [2025] ARTA 482.

The case involved sales of alumina by the company Alcoa which was shipped directly from its Australian refinery to a smelter in Bahrain operated by Aluminium Bahrain B.S.C (Alba).

Some of the alumina for some of the periods was invoiced to Alba. However, Alcoa also issued invoices for the alumina to a company called the Dahdaleh Entity. The Dahdaleh Entity then invoiced Alba at marked-up prices. The Dahdaleh Entity in turn invoiced Alba at marked-up prices.

Alcoa had no association by way of shareholdings or common directorships with Alba or the Dahdaleh Entity.

The Commissioner of Taxation accepted that they were arm’s length parties, but claimed that Alcoa and the Dahdaleh Entity were not dealing at arm’s length.

The dispute involved two main issues arising under section 136AD of the Income Tax Assessment Act 1936. The main issues were whether Alcoa was dealing at arm’s length with the Dahdaleh Entity and whether Alcoa received less than arm’s length consideration for the supplies it made to the Dahdaleh Entity.

During the period 2002 to 2009, Alcoa was supplying all of Alba’s requirements of alumina to the Dahdaleh Entity based on two distribution agreements, executed in 2002 and 2005 respectively.

The 2002 distribution agreement had agreed pricing for a period of three years, and the 2005 distribution agreement had agreed pricing for a period of 10 years.

The Commissioner engaged the opinions of two experts, including George Korenko and Markus Meurer, as part of the proceedings. Meurer was engaged by the Commissioner to give an expert report based on his commercial experience in trading and marketing alumina and bauxite in the global market.

He was instructed to consider the period between 1 January 1993 to 31 December 1995, and 1 January 1997 to 31 December 2009.

Harris rejected a proposition by the counsel for the Commissioner that the Formula Tonnage and Market Tonnage supply arrangement used by the companies from 1993 until 2001 was “not reasonable" and “an unwise structure”, because of the asserted lack of control over prices charged to Alba.

He noted that in terms of price performance over time, the outcomes achieved by Alcoa in that period were comparable to other transactions that it undertook in markets throughout that entire period.

For the period from 2005 to 2009, Meurer noted that the pricing formula under the 2005 distribution agreement did not produce adverse economic results in all of the relevant years it applied.

However, Meurer was of the view that for an agreement covering such a large volume of alumina, he would have expected independent parties to have agreed on periodic (annual) price reviews in order to reduce the risk of selling or procuring alumina at prices significantly removed from the market.

Meurer further reasoned that participants would have been aware that the alumina market structure was changing and a significant price volatility was expected at the time when the 2005 distribution agreement was put in place.

He reached the conclusion that the omission of annual price review terms in the 2005 distribution agreement meant that the consideration was not arm’s length consideration for each of the 2005 to 2009 years, even for years in which the pricing formula did not create adverse price outcomes for Alcoa.

Meurer also provided a range of prices (low to high), which in his expert opinion represented arm’s length consideration for the years 2002 to 2009.

The tribunal noted that Alcoa received a price equal to or above what Meurer considered to be arm’s length consideration for the years 2002 and 2007, 2008, and 2009.

“It follows that on the Commissioner’s own evidence, Alcoa did not receive less than arm’s length consideration for those years,” the Tribunal said.

“It is difficult to understand how the Commissioner pursued a claim with respect to those four years when the opinion of his own expert did not support his case.

“Meurer’s insistence that the consideration received by Alcoa was nevertheless less than arm’s length consideration because the distribution agreements did not contain price review provisions is, in our view, untenable.”

Alcoa also relied on expert witnesses which included Greg Harris and Dr Philip Williams.

Harris disagreed with Meurer’s views and said that contracts were tailored to reflect what sellers and buyers would accept at the time of negotiation and on occasion, but not always, this included price review provisions.

Harris outlined that based on a review of contracts in the industry, price reviews were not the industry default. He said that parties enter into term contracts to provide supply surety, reliable product quality and to have confidence around pricing levels.

He also criticised Meurer’s approach which assumed that all tonnage has been sold on a short-term basis “where current indicators [and] even some spot prices were relevant to include”.

The tribunal said the difficulty with this approach was that long-term contracts reflected the needs of buyer and seller at the time of negotiation, and there were movements in the market which were not and could not have been known at the time the pricing was agreed.

“Notwithstanding the subsequent movements in market prices, we agree it was reasonable for Alcoa to have entered into a three-year contract with prices linked to LME in late 2001,” the tribunal said.

The tribunal concluded that Alcoa had proven that the consideration it received for the relevant supplies in each of the relevant years was not less than arm’s length consideration.

“It follows that Alcoa has proved the assessments are excessive and the amounts that should be assessed are the returned amounts based on the actual consideration received by Alcoa,” it said.