1. Introduction

On 30 April 2025, the Administrative Review Tribunal handed down its decision in Alcoa of Australia Ltd v Commissioner of Taxation [2025] ARTA 482. The case centred on Alcoa’s multi-billion dollar alumina exports to Bahrain between 1993 and 2009 and therefore predated the introduction of the more contemporary transfer pricing rules in Division 815. Although the decision relates to the old rules, it is likely to be relevant to the operation of Division 815 and in particular the:

• Evidence required; and
• Methodologies used in transfer pricing disputes.

At the heart of the dispute was the Commissioner’s claim that Alcoa undercharged for its alumina by over USD 420 million, resulting in a tax shortfall of more than AUD 213 million. The Tribunal’s judgment not only clarified how the Comparable Uncontrolled Price (CUP) method should be applied in practice, but also marked a reaffirmation of the role of contextual economic analysis and expert evidence in defending against transfer pricing adjustments under Division 13 of the Income Tax Assessment Act 1936 (ITAA 1936).

In recognition of the significance of the administrative decision being challenged, alongside the scale and complexity of the matter, the Tribunal was comprised of three members (a unique feature of the new Tribunal) who collectively decided in favour of the taxpayer. This is a significant loss for the Commissioner, and, following the loss of the Commissioner in Glencore, demonstrates that it is not just the taxpayer who faces significant litigation risk.

This case once again demonstrates that taxpayers who are well prepared and are willing to stand their ground can and do achieve positive outcomes, and that taxpayers should be careful to not yield to pressure from the Commissioner that might lead them to concede advantageous positions.

2. Background facts

Alcoa of Australia Ltd (Alcoa) engaged in the sale of smelter grade alumina (SGA) over a span of several decades. Between 1993 and 2009, Alcoa sold alumina to Aluminium Bahrain B.S.C. (Alba), sometimes directly and at other times indirectly through an intermediary entity associated with Mr. Victor Dahdaleh (Dahdaleh Entities). These arrangements raised red flags for the Australian Taxation Office (ATO), which initiated investigations under Division 13 of the ITAA 1936. The core dispute centred on whether Alcoa received arm’s length consideration and whether the transfer pricing rules in effect at the time of the transactions had been breached.

Chronology of key events

• 1971: Alba begins operating its alumina smelter in Bahrain. Alcoa begins supplying alumina.
• 1981–1993: Mr. John Pizzey, an employee of Alcoa becomes involved in alumina marketing and sales; early contracts with Alba and Amalgamated Metals Corporation (AMC) negotiated.
• 1990: Alcoa and Alba sign the '1990 Supply Agreement' which sets different pricing mechanisms for Formula Tonnage (up to 600,000 mt/year) and Market Tonnage (amounts above 600,000 mt/year).
• 1993–1995: Alcoa invoices Formula Tonnage directly to Alba, but Market Tonnage is sold via the Dahdaleh Entities.
• 1996: No alumina was sold to the Dahdaleh Entities.
• 1997–2001: Bifurcated invoicing continues Market Tonnage remains indirectly invoiced to a Dahdaleh Entity under a contract between Alcoa and Alumet Ltd known as the 1996 Alumet Supply Agreement.
• 2002–2009: Alcoa begins invoicing all alumina destined for Alba to the Dahdaleh Entities under new distribution agreements.
• 2014: Alcoa's affiliate, Alcoa World Alumina LLC (AWA), pleads guilty in the U.S. to FCPA violations relating to bribes paid by Mr. Dahdaleh.
• 2022: Commissioner issues objection decisions rejecting Alcoa’s contentions and amending assessments.

Issues

The case revolves around the application of Division 13 of the ITAA 1936, specifically section 136AD(1), which allows the Commissioner to substitute an arm’s length price if certain conditions are met. The key issues were as follows:

• Whether the transactions were governed by international agreements [s 136AD(1)(a)].
• Whether the parties (Alcoa and the Dahdaleh Entities) were not dealing at arm’s length [s 136AD(1)(b)], which Aloca bears the burden of proof to establish.
• Whether the consideration received was less than what might reasonably be expected under arm’s length conditions [s 136AD(1)(c)].

Ultimately, the issue for the Tribunal was whether the Commissioner was justified in making a determination to apply s 136AD(1) [s 136AD(1)(d)].

The CUP methodology

The Comparable Uncontrolled Price (CUP) method was used by the Commissioner to assess whether Alcoa received fair market value for its alumina. This method involves comparing the price of a controlled transaction to that of similar transactions between unrelated parties.

Key outcomes included:

• Alcoa argued that pricing for Formula and Market Tonnage should be analysed together due to collective negotiations.
• The Commissioner disagreed, asserting that the two sets of invoices constituted distinct transactions.
• The Tribunal concluded that a holistic view of the commercial context was essential for a valid CUP analysis, and in many cases, Alcoa's prices were consistent with or above those found in comparable market transactions.

Experts and evidence

Alcoa and the Commissioner both relied heavily on expert economic evidence:

Alcoa's Experts

1. Mr. Greg Harris provided multiple reports analysing long-term contract prices and market comparability.
2. Dr. Philip Williams focused on economic context and supported Alcoa’s claim that the combined transactions were at arm’s length.

Commissioner’s Experts

1. Dr. George Korenko criticized Alcoa’s methodology and proposed higher arm’s length prices.
2. Mr. Markus Meurer examined pricing benchmarks and asserted that Alcoa’s indirect sales underpriced the alumina.

Lay evidence was provided by Mr. Pizzey, who was cross-examined and discussed historical negotiations. The Tribunal found his testimony credible, although it noted gaps due to his absence during some later years.

The Tribunal also reviewed documentary evidence, including thousands of pages of contracts, invoices, correspondence, and submission books (with the taxpayer's appeal book comprising approximately 30,000 pages).

The Tribunal preferred the approach of Aloca's experts, on the basis that the approach was consistent with the characterisation of the relevant international agreement and supplies made under the international agreement.

Outcome

The Tribunal allowed all of Alcoa’s objections in full and set aside the Commissioner’s determinations. It found:

• the parties may not have been dealing at arm’s length due to the presence of bribery allegations, but
• the actual consideration received by Alcoa was not less than arm’s length consideration, thus failing the test under s 136AD(1)(c).

This meant the Commissioner’s assessments, which exceeded even his own expert evidence, were excessive. As a result, the amended tax assessments totalling over AUD 213 million in additional tax were overturned.

3. Key takeaways

CUP methodology must be applied with rigor

• The decision underscores the importance of consideration for the broader commercial and financial relations when applying the comparable uncontrolled prices (CUP) methodology.
• Both Alcoa and the Commissioner relied on experts who applied the CUP methodology. Emphasising that not all CUPs are equal, the Tribunal favoured application of the CUP methodology that accounted for commercial and financial relations, and was supported by robust evidence.
• The Tribunal rejected a simplistic or overly mechanical use of the CUP method. It emphasized functional comparability, economic context, and commercial realism.

Functional analysis is central to transfer pricing

• The Tribunal placed strong weight on a detailed functional analysis—examining the roles, assets, and risks assumed by each party.
• In Alcoa’s case, the Tribunal scrutinized whether the related-party sales of alumina resembled third-party transactions in terms of risk allocation and market exposure.

Long-term contracts vs spot prices

• The Tribunal was cautious about using spot market prices as reliable comparables for long-term contracts.
• This is a crucial learning for applying CUP in extractive industries or commodity markets, where price volatility and contractual differences matter.

Expert evidence must be objective and robust

• The Tribunal provided detailed commentary on the quality of expert evidence.
• The Tribunal stated that the approach of the Commissioner's experts was flawed as they had not properly considered the relevant circumstances or characteristics in forming an opinion on 'arm's length consideration'.
• The Tribunal identified that these shortcoming stemmed from the sample of business records the Commissioner had furnished their experts with, asserting that these records had been 'cherry picked', and that critical documents had been omitted.
• Additionally, the Tribunal noted that Commissioner's experts had not sufficiently considered pertinent statutory tests and decisions from case law.
• These comments emphasise the importance placed by the Tribunal on ensuring that expert evidence is objective and accounts for all relevant legal and factual facets of a matter.

Commercial and economic reality over formalism

• The Tribunal emphasized that substance prevails over form.
• Even if related-party transactions were documented to mimic arm’s length terms, what mattered was whether they reflected commercial reality.

Implications for future transfer pricing disputes

• In cases involving competing CUP analysis between the taxpayer and the Commissioner, the tribunal or the Court will likely favour a CUP analysis that is grounded in the commercial reality of the transactions at issue.

The decision: Impact and implications

This decision has broad implications for multinational enterprises and the application of Division 13 with respect to historical disputes. Notwithstanding most taxpayers would now fall within the confines of Division 815, the decision still has broader implications:

• Reinforces the need to analyse real-world commercial contexts in transfer pricing disputes.
• Highlights the limits of a mechanical application of the CUP method.
• Affirms that bribery or corrupt practices do not automatically result in a finding of non-arm’s length consideration.
• Warns the ATO against making determinations that contradict its own expert valuations.

Ultimately, the case underscores the importance of coherent documentation, nuanced economic analysis, and a fair assessment process under Division 13.

The Commissioner of Taxation will have 28 days to appeal the decision to the Federal Court.

To discuss how this development could impact your organisation, feel free to reach out at any time.