1. Background
The mining sector is a globally relevant industry recognized for its complexity and the number of transactions it encompasses. In this context, related-party transactions can raise significant risks associated with Transfer Pricing. These risks may arise due to the specific nature of the industry, the variability of mineral prices, the ownership and control structure of mining companies, as well as the complexities of mineral sales and distribution contracts.
2. Issues
The mining industry is subject to the instability of mineral prices, which can fluctuate significantly due to economic, political, and supply and demand factors. Likewise, the value chain in this sector can involve multiple procedure stages, such as exploration, extraction, processing, transportation, and commercialization of minerals. Each procedure stage may involve related-party transactions, which increases the complexity of Transfer Pricing. In addition, mining companies often operate in multiple jurisdictions and may have complex ownership and control structures. This can generate Transfer Pricing risks, given that companies may seek to take advantage of differences in tax rates or policies between countries.
The current Transfer Pricing legislation for this sector is one of the weakest points in this type of regulation due to the unclear and highly controversial application of the sixth method established in the regulations to analyze transactions related to commodities, where exports and imports of minerals are included.
3. Alternative Solutions
Therefore, on May 10 of this year, the OECD, jointly with the Intergovernmental Forum on Mining, Minerals, Metals, and Sustainable Development, published practical guidelines for mining companies to submit their queries to avoid tax base erosion and profit shifting in this sector. These guidelines aim to enhance the Transfer Pricing regulation in this sector and reduce tax base erosion and profit shifting.
These guidelines consist of two manuals referred to as “Toolkit.” The first one is referred to as “Determining The Price of Minerals: A Transfer Pricing Framework,” and the second one is referred to as “Determining the Price of Minerals: A Transfer Pricing Framework, Schedule A: Bauxite.”
Source: Precios de Transferencia y Minería / Legal Today 11/07/23
