In many developing countries, mineral resource exploitation represents not only a significant source of tax revenue, but also a critical area where multinational companies can resort to sophisticated profit transfer strategies. In this context, the OECD–IGF BEPS in Mining program has emerged as a specialized initiative to mitigate the risks inherent in the mining sector related to base erosion and profit shifting (BEPS).
From an international taxation perspective, one of the most significant risks is that the prices applied in intra-group transactions (e.g., sales of mineral concentrates between subsidiaries) do not reflect market conditions (i.e., do not comply with the arm’s length principle). The program recognizes this risk and proposes tailored sectoral tools to combat it.
This article analyzes the conceptual framework, the specific challenges of the mining sector in terms of transfer pricing, the content and scope of the OECD-IGF program, and some critical reflections on its implementation challenges.
General conceptual framework: BEPS and transfer pricing
BEPS: definition and scope
The term BEPS (Base Erosion and Profit Shifting) refers to international tax planning strategies through which multinational companies exploit legal loopholes, regulatory disconnects, or asymmetries between tax systems to reduce their effective tax burdens or shift profits to low-tax jurisdictions.
Within the OECD/G20 BEPS project, 15 actions were defined to equip tax administrations with tools to address these practices. Among them, actions 8 to 10 are particularly linked to transfer pricing and the alignment of results with value creation.
Transfer pricing and its role in BEPS
Transfer pricing regulates the terms of transactions between related entities within a multinational group (sale of goods, provision of services, financing, licensing, etc.). When these transactions are not priced at levels comparable to those that would be established by independent companies under similar conditions, the possibility arises that profits may be artificially shifted between jurisdictions.
The most widely recognized guide in this area is the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, which establishes principles and methodologies for evaluating and correcting prices that do not meet the arm’s length comparison criterion.
However, the mining sector poses special challenges: the lack of comparables (processed minerals, concentrates), heterogeneity in quality, transportation, and costs, vertical integration structures (from extraction to refining), and the use of intermediate marketing centers or “hubs” in low-tax jurisdictions.
The OECD–IGF BEPS in Mining program
Objectives and structure
The BEPS in Mining program is a collaboration between the OECD (through its Centre for Tax Policy and Administration) and the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF). Its purpose is to strengthen the technical capacity of mineral-rich countries to:
- Identify and mitigate tax erosion risks (BEPS) specific to the extractive sector.
- Develop practical tools (guides, toolkits, sector notes) that adapt transfer pricing principles to the mining context.
- Provide direct assistance to specific countries for risk assessment, audit support, training, and policy recommendations.
The program’s strategy can be seen as “one-to-many” (public tools) and “one-to-one” (country-specific advice).
Topics covered
Although transfer pricing is a central focus, the program recognizes that the loss of tax revenue in mining can be due to multiple causes. In fact, the program literature identifies several critical areas:
- Abusive transfer pricing practices in the sale of minerals between related parties, consisting of the undervaluation of the product.
- Excessive interest deductions (taking advantage of intragroup financing).
- Undervaluation of mineral exports—that is, setting prices below what would be appropriate under independent conditions.
- Excessive tax incentives, which can erode the tax base without generating the promised investment or development.
- Tax stabilization clauses (which freeze contractual tax terms and limit the application of new regulatory improvements).
- International treaties and treaty abuse, which can allow tax mitigation through international intermediation structures.
- Indirect transfers of mining assets, where changes in control of entities can avoid local taxes.
- Metals streaming agreements/financing with future royalties, and abusive hedging arrangements.
In short, the program is not limited to transfer pricing, although that is its most distinctive technical focus.
The mineral pricing framework
One of the most recent and ambitious elements of the program is the development of “Determining the Price of Minerals: A Transfer Pricing Framework” (Practical Note), which seeks to adapt transfer pricing principles to the particular challenges of the mining sector.
This document aims to:
- Identify the fundamental economic factors that shape the price of a mineral (quality, grade, transport, processing, risk, volume, cost of capital, etc.).
- Apply the principle of Comparable Uncontrolled Price (CUP) (or comparable methods) adapted to the mineral context.
- Offer simplified administrative approaches for jurisdictions with limited technical capacity.
- Be complemented by specific schedules for particular minerals, such as lithium, copper, or bauxite—practical applications of the general framework.
For example, a pilot version of the toolkit for copper is currently undergoing public consultation.
This sectoral approach aims to overcome the classic limitation of transfer pricing in mining: the scarcity (or inaccessibility) of truly comparable independent transactions.
Case studies: Zambia
A concrete example of the program is the support provided to Zambia, a country with high mining activity (copper). It was identified that certain mining companies were selling copper directly to marketing or refining subsidiaries located in low-tax jurisdictions at artificially low prices. This represented a transfer pricing abuse mechanism to shift profits out of Zambia. The program supported risk assessment and audits by the local tax administration (Zambia Revenue Authority).
This case illustrates a typical practice in mining: the use of marketing hubs or international trading centers as a vehicle to extract income from the producing country.
Technical aspects: particularities of transfer pricing in mining
Some of the most challenging and relevant areas in practice are:
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Identification of the comparable price (CUP) for minerals
- Often there are no identical independent transactions (e.g., copper concentrate shipped to a port under similar conditions).
- The “Determining the Price of Minerals” framework proposes comparisons with market prices (spot), mineral indices, adjustments for quality/grade, transportation, and delivery terms.
- Adjusted “market benchmarks” can be used, although it is key to make adjustments for differences in volume, quality, logistical risks, post-treatment, among others.
- In the absence of reliable comparables, it may be necessary to apply alternative methods (e.g., net margin, profit splits) as a second resort.
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Adjustments for transportation, freight, insurance, and logistics
A mining subsidiary may sell concentrate “f.o.b. local port,” while the purchasing subsidiary incurs international freight costs. Adjustments should reflect these actual differences.
If these costs are not refined, they can be used as mechanisms to manipulate the margin.
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Risk and return on invested capital
The price should reflect an adequate return for the mining subsidiary, considering risks (geological, operational, market) and cost of capital. This can vary significantly between projects.
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Vertical integration and functions assumed
If a mining subsidiary also performs processing, refining, or marketing functions, it is necessary to assess how much value it has added and how to allocate profitability among functions. In these cases, a value split or profit-sharing scheme may be applicable.
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Intragroup financing and interest deductions
Another common way of transferring profits is through internal financing at high rates, deducting interest in the mining country. The program anticipates this risk and considers it a complementary channel of tax erosion.
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Limited administrative capacity
Many mining countries face technical barriers (mineral quality laboratories, specialized personnel, access to market data). The program proposes simplified approaches, safe harbors, or sectoral guidelines to reduce the administrative burden.
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Documentation and auditing
Administrations must have robust technical documentation to justify the prices selected. Defending against adjustments requires that the taxpayer be able to demonstrate that they followed the most appropriate method and evaluated comparability, adjustments, and assumptions.
Potential challenges and criticisms
Although the program is very ambitious and has great potential, there are several challenges worth highlighting:
- Availability of comparable data: In many countries, there are not enough independent transactions to serve as a reference, which limits the applicability of the CUP method except with extensive adjustments.
- Local technical capacity: Applying sector-specific guidelines requires experts with mining knowledge, access to geological and economic data, and laboratories to verify mineral quality.
- Implementation costs: For countries, conducting specialized audits consumes resources (time, specialized personnel).
- Acceptance by companies: Mining companies may question aggressive adjustments if the prices chosen reduce their expected margin.
- International litigation and tax burdens: International disputes may arise if the administration adjusts prices and the company proposes resolution mechanisms (arbitration, mutual agreements).
- Oversimplification in safe harbors: If standardized margins are offered, they could induce distortions or be exploited by taxpayers with projects that are riskier than the “standard.”
- Transformations of the international tax system: Future changes in the global tax architecture (e.g., G20/OECD pillars, global minimum taxes) may require adjustments to the approach.
Conclusion and recommendations
The OECD–IGF BEPS in Mining program represents an innovative effort to bring transfer pricing discipline to a highly complex sector such as mining. Its distinctive value is that it adapts the general principles of BEPS to the realities of the minerals market, providing practical tools for countries with limited technical capacity.
For the program to have a real impact, it is essential that target countries:
- Strengthen their technical staff in mining and international taxation.
- Establish international cooperation mechanisms for sharing mineral market data.
- Adopt the guidelines gradually, with local pilots and validations.
- Foster constructive dialogue with industry to achieve predictability and avoid excessive litigation.
- Monitor and periodically review price assumptions and adjustments in response to global market changes.
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Source: OCDE