OECD: Guidance on Transfer Pricing Issues for Bauxite

Following the completion of a previous consultation, on 6 November 2023 the OECD published a toolkit with the title Determining the price of minerals: A Transfer Pricing Framework – Schedule A: Bauxite. This toolkit follows on from the publication of the OECD’s toolkit outlining a transfer pricing framework for determining mineral prices, and deals with the specific issues involved in pricing bauxite. The toolkit aims to support developing countries in combating base erosion and profit shifting relating to the mining and processing of bauxite in their territory.

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 are designed to support developing countries in managing the challenges encountered in collecting tax revenue from the mining sector.

The toolkit looks at the market conditions and the physical characteristics of bauxite that are relevant in determining the transfer price. After looking at bauxite production and reserves, the toolkit examines the pricing fundamentals. The components for an agreement for the sale of bauxite are also reviewed. For example, the amount and type of impurities present will have an impact on the price of bauxite, and available by-products could potentially affect the transfer price if the bauxite miner has the relevant knowledge and techniques to extract the by-product. Additional costs may be incurred If there is high moisture content in the bauxite.

The guidance notes that bauxite is an important ore of aluminium and is purified using the Bayer process to produce aluminium oxide, often known as alumina. The terms and conditions of an agreement for the sale of bauxite will be specific to the commodity. The commercial value of the bauxite will be calculated taking into account the quantity of available alumina. This is defined as the portion of the total amount of alumina in the bauxite that can be extracted by a commercially viable process. The available alumina contained in the bauxite varies according to the mine and the country where the bauxite is extracted. The alumina content in the bauxite is typically specified as a percentage that is expected to be delivered, with premium or penalty adjustments then made on the basis of the actual bauxite quality in each shipment. The price will be impacted by any impurities present.

It may be possible to extract certain by-products from the ore, for example gallium or vanadium, and this can affect the price. Also, the quantity of moisture present in the bauxite can cause problems with handling and crushing and can affect the price. In practice most bauxite mining companies base the sale contract almost exclusively on total alumina and silica content, taking into account the moisture present. The sale contract does not normally incorporate all the metallurgical parameters such as minor elements.

Several pricing data agencies have begun to collect price information and to publish bauxite prices as the level of seaborne bauxite trade has increased. As a result of the quantity of Chinese imports, the available pricing data has increased, and bauxite price indices have been developed. Although the availability of pricing indices does not represent a substitute for the arm’s length price that would be agreed between independent parties, it provides a starting point for the computation of the transfer price. It is first necessary to establish the extent to which independent parties in negotiations actually use the indices. The results of collaborative interviews with industry participants show that the indices are used to provide information on the price of bauxite at a particular time. They do not determine the contract price, but they provide valuable information.

The toolkit also looks at the comparability factors such as the characteristics of the product, economic circumstances and contractual terms. A worked example is given to show how the bauxite index would be applied. Sources of information on bauxite are listed in the Appendix.

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