OECD: Practice Note on Transfer Pricing for Minerals

On 6 November 2023 the OECD published the final version of a practice note with the title Determining the price of minerals: A Transfer Pricing Framework. The practice note has been developed after consultation with interested parties with the aim of supporting developing countries in determining arm’s length prices. This will help to combat base erosion and profit shifting relating to extraction of minerals.

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 guidance will assist developing country governments in ensuring that multinationals pay the correct amount of tax in relation to profits earned in the countries where they operate. The practice notes and toolkits will look at the challenges encountered by developing countries in collecting tax revenue from the mining sector.

For developing countries 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 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. Often the tax administrations do not have the resources available to identify the areas where there is a risk of base erosion and profit shifting in extractive industry operations. The practice note on determining the price of minerals can help tax administration efforts by providing guidance on the potential areas of transfer pricing risk in the supply chain for extractives.

The practice note examines the various stages in the mining value chain including the exploration stage, development, production and processing, refining and smelting. The guidance sets out the common transfer pricing risks arising from cross-border transactions between related parties in a mining multinational.

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 such as related-party debt, derivatives or other 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 the 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 risk of transfer mis-pricing.

The practice note 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 such as the characteristics of the product, the economic circumstances at the time of the sale and the contractual terms. The practice note also includes simplified administrative approaches to pricing mineral sales with the aim of potentially reducing the administrative burden for developing country tax administrations.

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