On 10 May 2023 the OECD published a consultation document with the title Determining the price of minerals: A Transfer Pricing Framework. This is a draft toolkit to support developing countries in combating base erosion and profit shifting relating to extraction of minerals in their territory. Comments on the draft toolkit were invited by 14 July 2023.

Mineral resources are potentially an important source of tax revenue to boost domestic resource mobilisation and make progress towards the sustainable development goals. Many developing countries are however held back in their tax collection efforts because the multinational enterprises operating in their territory use various strategies to avoid tax, including incorrect pricing of minerals transferred to related parties.

To help governments combat base erosion, the OECD’s Centre for Tax Policy and Administration is producing a series of practice notes and other tools in collaboration with the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF). The practice notes will examine the challenges encountered by developing countries in collecting tax revenue from the mining sector.

Transfer Pricing Risks in the Mining Value Chain

The document looks at the stages in the mining value chain including the exploration stage, development, production and processing, refining and smelting. It outlines common transfer pricing risks arising with transactions between cross-border related parties in a mining multinational. For example, at the exploration stage transfer pricing risks can arise from intragroup technical services or intragroup rental of specialised equipment which can be charged at a price above the arm’s length price.

At the development stage the most significant transfer pricing risk can arise from intragroup financing which can take the form of related-party debt, derivatives or less usual funding structures such as related-party metal streaming arrangements. Transfer pricing risk can also arise at the development stage from intragroup technical services, management services, and international secondees.

At the production stage transfer pricing risk can arise from the sale of minerals using related-party sales and marketing entities. These could charge a service fee or agency commission or receive a discount on the sale price of the mineral; or they could incorrectly price the mineral. The sales and marketing entities used by a multinational may have little economic substance.

At the processing, refining and smelting stage transfer pricing risk can come from related-party refining and smelting facilities. These may charge excessive fees for treatment and refining; or a sales and marketing entity could be interposed between the mining entity and the refinery or smelter with accompanying transfer pricing risk.

Transfer pricing methods

The document sets out a framework for applying the comparable uncontrolled price (CUP) method to arrive at a price for minerals. As adequate pricing information is available in the extractive sector, the CUP method would generally be an appropriate method to use in pricing related-party mineral sales. The document looks at the comparability analysis required and the use of the main comparability factors which would be the characteristics of the product, the economic circumstances at the time of the sale and the contractual terms.

Mineral-Specific Factors Impacting Price

Not all commodities have a publicly quoted price. In such cases, the risk of transfer mispricing may be higher than with minerals that have a quoted price. The opportunity to misstate the transfer pricing is low in the case of precious metals, physical concentrates such as copper and nickel or bulk commodities such as iron ore and manganese. The risk of misstated pricing is higher in the case of non-metallic industrial minerals such as graphite, industrial diamonds or beryl.

Administrative approaches

Governments could improve compliance by publishing their recommended pricing methodology for specific minerals. Countries that are limited in their administrative capacity could consider a safe harbour approach, under which companies that setting prices in related-party transactions in a way defined by the government are not investigated further by the tax administration.