Australia: Commissioner of Taxation v SNF (Australia) Pty Ltd (2011): Practical implications for the application of the Comparable Uncontrolled Price ("CUP") transfer pricing methodology

Last Updated: 7 June 2011
Article by Daren Yeoh

SNF is a wholly owned subsidiary of a French company. SNF is a distributor of polyacrylamide products acquired from related party manufacturers of the product. SNF used the CUP method to show that it paid less for its stock purchases as compared to the prices paid by comparable independent companies (the "independent companies").

In general terms, when applying the CUP method, a taxpayer may, inter-alia, seek to compare the price paid for goods acquired from a related party seller (the "controlled transaction") to the price paid by independent parties for the same product (the "uncontrolled transaction"). However, the two transactions and the parties being compared must be established to be "reliable comparables". The Full Federal Court findings demonstrate the need to apply pragmatism in performing this comparability analysis.

The Commissioner submitted that the Australian transfer pricing rules require the hypothesis of an arm's length taxpayer that had the very same characteristics as the taxpayer (i.e. SNF) apart from its association with the offshore related parties. In the present case, SNF was a distributor of polyacrylamides products incurring sustained losses, was smaller in size relative to the independent companies, suffered poor management and stock defalcation, had a strategy of seeking to increase market share etc. Following the Commissioner's line or argument, SNF would have had to find independent companies sharing exactly the same characteristics (bearing on price) as it in order to apply the CUP methodology. The Court rejected the Commissioner's approach, explaining that the transfer pricing rules do not mandate such an approach. Further the Court highlighted that the Commissioner's approach would necessarily have meant that "...a taxpayer, who bears the onus in tax appeals, can never succeed in such a case for the bar will be set at an unattainable height."

Implications for Comparability analysis

The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the "OECD Guidelines") explain that attributes or "comparability factors" that may be important when determining comparability include the characteristics of the property or services transferred, the functions performed by the parties (taking into account assets used and risks assumed), the contractual terms, the economic circumstances of the parties, and the business strategies pursued by the parties.

Product and contractual terms

The OECD guidelines state that the characteristics that may be important to consider in the case of transfers of products include the physical features of the property, its quality and reliability, and the availability and volume of supply SNF initially conducted its comparisons using products in the same product group. Purchases of similar volumes by independent distributors were selected and adjustments were made for differences in currency, discounts, payment terms and freight costs.

The expert witness for the Commissioner highlighted significant price variations within groups and argued that comparisons should be made using the same products (as opposed to those in the same product group). The taxpayer performed an analysis using the same products and achieved the same results i.e. SNF paid less than those paid in the uncontrolled transactions.

Functions performed

SNF being a distributor of polyacrylamides, selected independent companies performing distribution functions. The Commissioner noted that the independent companies selected were larger than SNF. He opined that companies further along the supply chain (to the end users) might be charged higher amounts. This implied that SNF would have had to find independent companies sitting at the same position as it in the supply chain. The Court rejected this argument and held that it was, broadly speaking, sufficient for SNF to prove that the independent companies performed distribution functions.

Economic circumstances, markets and use of overseas data

The Commissioner's initial argument was that " evidence was led about the economic circumstances of [the independent companies] and in particular whether they purchased and sold at a profit". The Court held that the transfer pricing rules are not concerned with the economic circumstances of the parties but rather of the markets in which the transactions were taking place.

It is highlighted that SNF selected independent companies located outside Australia. The expert witness for the Commissioner contended that only Australian companies should be selected, highlighting variations in prices between different countries.

The Court was satisfied that there was evidence of the existence of a single global market for the product and price differences between countries resulted from competitive (including the negotiation strength/ purchasing power of the purchaser) rather than local effects. In particular, there was evidence of parties negotiating prices on a worldwide basis.

The Commissioner also highlighted that less than 1% of the sales transaction being investigated occurred in Australia. Given the evidence of a single global market, the Court felt that this point was "...of no substance".

Business strategies

The Commissioner submitted that SNF had not provided any evidence about the business strategies of the independent companies. The Court questioned the need for this stating "...the taxpayer's burden of proof did not require it to tender proof positive of every fact no matter how mundane or pedestrian; ...there was no reason to think that the businesses of the [the independent companies] were conducted on other than the ordinary basis of seeking to make profits from their distribution activities or that they were pursuing any out-of-the-ordinary strategy which might have affected the prices paid by them".

Other matters – reasons for losses

The Court also explained that the focus of the transfer pricing rules is to establish whether arm's length consideration has been paid/received and "...cannot include the requirement of investigation or consideration...of motive and purpose". In this regard, the Court interestingly questioned the utility and significance of the debate as to why SNF incurred sustained losses.

However, it is cautioned that in most cases, reliable CUPs are hard to come by. In the absence of CUPs, taxpayers incurring sustained losses are advised to analyse and document reasons for such losses.

If you have any questions in relation to this article or wish to discuss any International tax or transfer pricing matters, please contact Daren Yeoh on (03) 8635 1800 or

This publication is issued by Moore Stephens Australia Pty Limited ACN 062 181 846 (Moore Stephens Australia) exclusively for the general information of clients and staff of Moore Stephens Australia and the clients and staff of all affiliated independent accounting firms (and their related service entities) licensed to operate under the name Moore Stephens within Australia (Australian Member). The material contained in this publication is in the nature of general comment and information only and is not advice. The material should not be relied upon. Moore Stephens Australia, any Australian Member, any related entity of those persons, or any of their officers employees or representatives, will not be liable for any loss or damage arising out of or in connection with the material contained in this publication. Copyright © 2011 Moore Stephens Australia Pty Limited. All rights reserved.

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