On 15 March 2022 the OECD published a blog post on its website commenting on the importance of capacity building to enable tax administrations to collect a fair amount of tax and royalties from mining activities.
The post highlighted the training given to tax administration officials in Latin America by the OECD’s Inclusive Framework together with the Inter-American Center of Tax Administrations (CIAT) and the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF).
As the mining sector is important for the economies of a number of countries in Latin America, it is important to collect the right amount of tax from the sector to ensure appropriate funding for government projects to support workers and communities and to reduce the negative environmental effects from mining.
Collection of government revenue in mining can be reduced when companies engage in tax erosion and profit shifting (BEPS). This type of abuse can reduce trust in the system and have more general social and economic consequences. The risks from profit shifting can be managed by tax officials with the help of the relevant training programs covering a range of relevant issues and providing opportunities for sharing of information among tax officials. Feedback from training programs allows the partner organisations to pinpoint the issues on which more capacity building support is required.
Previous training courses have highlighted the need to fill knowledge gaps on mineral pricing and metals streaming contracts.
Mineral pricing
The correct valuation of minerals is important for determining the profit for corporate income tax purposes and for calculation of the mining royalties. However, as minerals are sold at various stages of beneficiation the market price can be difficult to establish. This results in a risk of underpricing in mineral transactions between related parties.
Some minerals do not have publicly quoted prices to use as a reference. Where there are quoted prices for some minerals, comparability adjustments are required to adjust for the grade and quality of the minerals and for other costs such as transport. Tax officials dealing with cases involving mineral pricing need specialised knowledge.
Metals streaming
A developer may agree to sell future mineral products with a discount to the price in return for payment up-front. This mechanism can benefit small operators who cannot obtain the required funding for their operations through the equity and debt markets. Around half the streaming deals that take place are in the Americas so capacity building on these issues is important.
Characterisation of the payments related to metals streaming is also a problem for tax administrations, for example the transactions have features of financing agreements and of mineral sales. The tax administration must determine the tax treatment of the up-front payment; and calculate revenue from the sale of discounted minerals. Where metals streaming contracts are concluded between related parties, there is a potential for transfer mis-pricing and the tax administration needs the appropriate specialist knowledge to manage this risk.
