On 30 April 2025, the Administrative Review Tribunal handed down its decision in Alcoa of Australia Ltd v Commissioner of Taxation (Taxation and business) [2025] ARTA 482. Finding against the Commissioner, the Tribunal’s decision highlights the importance of commercial context in transfer pricing disputes. Although the decision relates to the since-repealed Division 13 of the Income Tax Assessment Act 1936 (ITAA 1936), the Tribunal’s approach of looking at the transactions between the parties more broadly is potentially relevant to the determination of arm’s length conditions under Subdivision 815-B, notwithstanding the case’s unique fact pattern.
Background
The dispute concerned sales of alumina by an Australian resident entity, Alcoa of Australia Ltd (Alcoa), directly and indirectly to Aluminium Bahrain B.S.C (Alba), which operated an aluminium smelter in Bahrain. The Tribunal reviewed the Commissioner’s decision to disallow objections to assessments, which contained transfer pricing adjustments for the period from 1993 to 2009. During this timeframe, Alcoa sold alumina to Alba both directly and through intermediaries called the “Dahdaleh Entities” which were associated with Mr Dahdaleh. The Dahdaleh Entities on-sold their purchased alumina to Alba at marked up prices.
The Commissioner determined that Alcoa and the Dahdaleh Entities were not dealing at arm’s length and that Alcoa had received less than arm’s length consideration for the supplies it made to the Dahdaleh Entities. This determination was made against the backdrop of US proceedings against Alcoa’s related entities, which had been settled by those parties. The Commissioner relied upon certain admissions made by Alcoa’s related parties in settlement of those proceedings, including that Alcoa knew or consciously disregarded that Mr Dahdaleh was inserted into the Alba supply chain and imposed a mark-up on sales of Alumina to Alba to make corrupt payments to Alba executives and Bahraini officials.
The Tribunal noted several key points of interest in respect of the case, including:
- While the relevant parties to the arrangement were arm’s length parties, the Tribunal did not accept Alcoa’s submission that Division 13 can only apply to supplies between non-arm’s length parties.
- The Tribunal found that Alcoa had not discharged its burden of proof that it was dealing at arm’s length with the Dahdaleh Entities. This was despite the Tribunal finding, based on the evidence led by Alcoa, that the parties were negotiating in their own respective commercial interests. However, the Tribunal found that Alcoa had not proved that it did not collude in respect of the bribery arrangements (due to lack of positive evidence led on this point). The Tribunal did not, however, go further to make a positive finding that Alcoa did not deal at arm’s length with the Dahdaleh entities.
- In finding that Alcoa did not receive less than an arm’s length price for its sales of alumina, the Tribunal’s decision emphasises the importance of determining the arm’s length consideration by reference to relevant commercial context. The Commissioner’s approach of focusing only on the sales from Alcoa to the Dahdaleh Entities, without regard to the broader supplies to Alba, was found to be artificial and defy common sense.
- For some years during the period in dispute, the Commissioner assessed Alcoa based on it receiving consideration greater than that determined by the Commissioner’s own expert witness. The alumina prices achieved by Alcoa in those years were higher than the arm’s length prices concluded by the Commissioner’s experts.
Key Issues
The Tribunal’s decision turned on two main questions arising under section 136AD of Division 13:
- 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.
These questions were assessed for three distinct periods, reflecting the different supply arrangements in place during each of those periods. These periods were:
- Period 1 (1993 to 1995): Alcoa was supplying “Formula Tonnage” and “Market Tonnage” to Alba under the 1990 Supply Agreement.
- Period 2 (1997 to 2001): Alcoa was supplying alumina to Alba by way of Formula Tonnage pursuant to the 1990 Supply Agreement and Market Tonnage through Alumet, a Dahdaleh Entity, under a contract known as the 1996 Alumet Supply Agreement.
- Period 3 (2002 to 2009): Alcoa was supplying all of Alba’s alumina by way of Market Tonnage using Alumet, according to two distribution agreements executed in 2002 and 2005.
In respect of the earlier periods, Formula Tonnage referred to the supply of up to 600,000 metric tonnes annually to Alba, while Market Tonnage represented tonnage in excess of that amount invoiced to the Dahdaleh Entity (though ultimately also delivered to Alba) priced on a different basis.
Tribunal’s Decision
Assessing the three periods separately, but ultimately coming to a consistent conclusion, the Tribunal found that, although Alcoa was unable to discharge its burden of proof that it dealt at arm’s length with the parties, the consideration received for the relevant supply of alumina was not less than an arm’s length amount.
The relevant agreement for the supply of property (s 136AD(1)(a))
Periods 1 and 2
The Tribunal was first required to identify the relevant “international agreement” and, under that agreement, the relevant “supply of property” for the purposes of applying section 136AD. The Tribunal concluded that the relevant agreement was a tripartite one to which Alcoa, Alba and Alumet (the relevant Dahdaleh Entity) were all party, and which covered the supply of alumina on to both Alba and Alumet. Despite this finding, however, the relevant supply of property was accepted by the Tribunal to be exclusively the Market Tonnage, seemingly on the basis that it is only the non-arm’s length supply that has been identified by the Commissioner in his decision subject to review that is relevant. The Tribunal was careful to observe that it did not follow from this conclusion that the supply of Formula Tonnage was to be ignored for all purposes.
Period 3
It was not in dispute that, for Period 3, the relevant agreements were successive distribution agreements entered into between Alcoa and Alumet.
Whether there were arm’s length dealings (s 136AD(1)(b))
The Tribunal clarified that it is possible for unrelated parties to enter into non-arm’s length dealings for the purposes of section 136AD.
The Tribunal found that Alcoa had failed to discharge its onus of proof that it did not collude with the Dahdaleh Entities to facilitate the payment of bribes. This conclusion appears to have followed from Alcoa’s decision to not call any evidence to explain or contradict the statements made by Alcoa Inc, a related party, in its offer of settlement in US SEC proceedings. The Tribunal accepted the Commissioner’s contention that facilitating the payment of bribes is inconsistent with an arm’s length dealing. While acknowledging that there were robust commercial negotiations over the agreed price for each of the three periods in question, this evidence was held not to mitigate the effect of the arrangement which facilitated the payment of bribes.
Whether less than arm’s length consideration was paid (s 136AD(1)(c))
In line with the decision in Federal Commissioner of Taxation v Glencore (2020) 281 FCR 219, the Tribunal emphasised the orthodox position of considering the actual characteristics of the taxpayer and the actual transaction for supply taking place in determining the hypothetical comparable agreement.
Periods 1 and 2
For the first two periods, the Tribunal commenced its analysis by considering whether Formula Tonnage (being the direct supply of Alumina to Alba) should be, as proposed by the Commissioner, ignored for the purpose of considering whether the consideration paid for the Market Tonnage was arm’s length.
A closer look at negotiations for the first two time periods revealed that the price being paid by the intermediary entity to Alcoa was being negotiated with Alba as part of a package which dealt with all the alumina being shipped by Alcoa to Alba. According to the Tribunal,
[377] … To ignore the Formula Tonnage would be to change an integral characteristic of the actual supply by Alcoa and would be contrary to what the Full Court said in the Glencore decision, namely, that, in general, the hypothetical transaction for the purposes of Division 13 had to remain “close” to the actual transaction and that the actual characteristics of the taxpayer must “serve as a basis” for the comparable agreement.
It was concluded that the supply arrangements were conducted on a holistic basis and it would therefore go against the commercial reality of the situation to ignore the Formula Tonnage. That is, although the relevant product supplied was limited to Market Tonnage, it was relevant to consider the role of the Formula Tonnage in determining whether or not arm’s length consideration was received for the Market Tonnage. The analysis also required a degree of ‘depersonalisation’ from which it entailed that the distortion which arose out of the bribery and corruption claims was to be ignored.
Analysing the price received for the Market Tonnage in conjunction with the Formula Tonnage, the Tribunal concluded that it was unlikely Alcoa would have received greater consideration in the absence of any bribery or corruption, on the basis it received a genuine negotiated amount which resulted in a fair market price overall.
The Tribunal cited the conclusions of Alcoa’s experts in support of its conclusion, while downplaying the relevance of the evidence of the Commissioner’s experts on the basis that their instructions did not address the appropriate inquiry invited by section 136AD.
Period 3
The Commissioner’s experts provided mixed support for the Commissioner’s contentions that Alcoa received less than arm’s length consideration for each of the years in Period 3; each identified multiple years in which Alcoa appeared to have received an amount in excess of arm’s length consideration, and were only able to agree on two years during the period (2003 and 2004) in which Alcoa had received less than arm’s length consideration. In respect of this period, the Tribunal concluded that, having regard to prevailing market conditions at the time of entry into the relevant distribution agreement in 2002, Alcoa’s actions were reasonable. It followed that Alcoa had received arm’s length consideration in respect of its supply of alumina to the Dahdaleh Entities for Period 3.
Observations
The window to appeal the decision has expired without the Commissioner lodging an appeal. The decision therefore contains numerous observations unchallenged by the Commissioner which may assist taxpayers seeking to navigate section 136AD.
Onus of proof: Alcoa attempted to argue that, because section 136AD(1)(b) applies where the Commissioner is “satisfied” that parties were not dealing at arm’s length in relation to a supply, the burden of proof fell upon the Commissioner on this point. The Tribunal dismissed this argument and stated that section 136AD did not displace the general rule in section 14ZZK of the Taxation Administration Act 1953 that the applicant has the burden of proving that the assessment is excessive or otherwise incorrect.
Consideration received in respect of the supplies: The Tribunal suggested that the phrase “in respect of” as it appears in section 136AD(1)(c) contemplates the consideration regarding, concerning or referable to the supplies in issue. It followed that the consideration received by Alcoa in respect of the supplies (even if those supplies were limited to the supplies as submitted by the Commissioner, i.e., the Market Tonnage) would encompass all of the promises made under the arrangements regarding those supplies, including both Formula Tonnage and Market Tonnage.
Commercial context as critical: In determining the correct hypothetical for a comparative assessment of arm’s length pricing, the Tribunal went to great lengths to understand and replicate the commercial context as it existed at the time. This approach was critical to the Tribunal’s conclusion that the Formula Tonnage and Market Tonnage prices should be considered together, illustrated by its observation that to consider only the Market Tonnage price would be “devoid of a critical feature of the commercial context that is directly relevant to the determination of the consideration.”
Expert evidence and appropriate characterisation: Alcoa’s experts were preferred to those of the Commissioner. This result seems to follow from the instructions given to the Commissioner’s experts; specifically, both were asked to conduct an analysis exclusively of the pricing of the sales made to the Dahdaleh Entities, which the Tribunal described as “the wrong question”. The Tribunal’s scepticism towards this approach highlights the importance of asking experts the ‘right’ question in transfer pricing disputes.
