On 12 August 2024, a report on pricing of minerals was released by the OECD. The report (Determining the Price of Minerals) is specifically targeted the transfer pricing-framework for pricing of Lithium, but also contains arm’s length principles for pricing of commodities in general.  Abstract “In the mining sector, government revenue depends on mineral products being priced and measured accurately. This can be especially complex for semi-processed minerals such as lithium, which is primarily used for battery production. The schedule presented in this report applies the mineral pricing framework – as documented in the joint OECD/IGF work Determining the Price of Minerals: A Transfer Pricing Framework – to identify the primary economic factors that influence the price of lithium in applying the Comparable Uncontrolled Price method and ensure that developing countries are able to tax lithium exports appropriately.” ...

As another example of the use of intangibles in connection with a controlled transaction, assume that an exploration company has acquired or developed valuable geological data and analysis, and sophisticated exploratory software and know-how. Assume further that it uses those intangibles in providing exploration services to an associated enterprise. Those intangibles should be identified and taken into account in the comparability analysis of the service transactions between the exploration company and the associated enterprise, in selecting the most appropriate transfer pricing method for the transaction, and in selecting the tested party. Assuming that the associated enterprise of the exploration company does not acquire any rights in the exploration company’s intangibles, the intangibles are used in the performance of the services and may affect the value of services, but are not transferred ...

In July 2018 Center for Global Development published a study of special transfer pricing practices in the oil sector, and their potential application to hard rock minerals. According to the study, governments of mining countries are vulnerable to investors manipulating transfer prices as a means of avoiding paying taxes. The two main risks are mining companies undercharging for mineral exports sold to related parties, and overpaying for goods and services. The “solution” has been to apply the “arm’s length principle,” which gives governments the right to adjust the value of a related party transaction so that it accords with similar transactions carried out between independent parties. However, it has been apparent for many years that the arm’s length principle, with its reliance on “comparables” that in practice can rarely be found, is an inadequate response. The paper looks at whether special practices in the oil sector that provide materially greater protection against transfer pricing risk could be applied to hard rock minerals. These are (1) administrative pricing, where government, rather than the taxpayer sets the price for crude oil; and (2) the no-profit rule, which prevents joint venture partners from charging a profit mark-up on the cost of providing goods and services to the group. The paper finds that administrative pricing may be effective at curtailing undercharging of specific mineral products, for example, base and precious metals. The no-profit rule is a less obvious “fit” for mining given the lack of joint ventures, and alternative rules to limit cost overstatement may be required instead ...

The African Tax Administration Forum (ATAF) and the German Federal Ministry for Economic Cooperation and Development (BMZ), through the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH, have developed this toolkit for African tax authorities seeking to assess transfer pricing risk in the mining industry. The purpose is to strengthen authorities’ capacity to determine whether they should audit particular high-risk “related party transactions.” The toolkit employs a specific risk review approach, which focuses on particular transfer pricing issues that present a high risk to revenue (as distinct from a comprehensive risk review, which tax authorities use when they cannot detect where transfer  pricing issues are likely to arise). A loss of even 1 percent of the value of these transactions is likely to be significant for developing country revenues. These issues are also very prevalent: many African tax authorities report corporate services, including procurement and management, as common causes of tax loss. The four issues of focus are: 1. Marketing arrangements. A related company, for example a marketing hub, buys mineral products from the mine. The key issue is whether the mineral products are transferred to a fully fledged related party marketer that takes ownership of the product, performs value-adding functions and assumes entrepreneurial risk, or, more commonly, a hub that merely provides a support function. 2. Intercompany debt. A subsidiary receives debt from a parent or an affiliate company, often a corporate treasury located in a low-tax jurisdiction, to finance geological exploration or mine development. Debt generates interest payments, which are tax deductible. Most African countries currently limit the maximum amount of debt on which deductible interest payments are available, by way of a debt-to-equity ratio. However, the cost of related party debt (i.e., the interest rate) is difficult for tax authorities to price, leaving the tax base vulnerable to excessive interest deductions. 3. Procurement services. A company purchases mining goods and services on behalf of its subsidiary; the price charged to the subsidiary will include the direct cost, plus a “mark-up.” Usually in such cases the cost base should be the cost of providing the service, not the value of the goods. 4. Management services. The subsidiary pays a fee to a related party in return for a range of administrative, technical and advisory services ...

As another example of the use of intangibles in connection with a controlled transaction, assume that an exploration company has acquired or developed valuable geological data and analysis, and sophisticated exploratory software and know-how. Assume further that it uses those intangibles in providing exploration services to an associated enterprise. Those intangibles should be identified and taken into account in the comparability analysis of the service transactions between the exploration company and the associated enterprise, in selecting the most appropriate transfer pricing method for the transaction, and in selecting the tested party. Assuming that the associated enterprise of the exploration company does not acquire any rights in the exploration company’s intangibles, the intangibles are used in the performance of the services and may affect the value of services, but are not transferred ...