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09 Jul 2024
BY Robyn Kantor

Navigating Transfer Pricing challenges in the mining sector

The mining sector operates in a dynamic environment characterised by fluctuating commodity prices, complex value chains, and unique operational challenges. Transfer pricing in mining involves allocating profits among entities within multinational enterprise (“MNE”) groups engaged in exploration, extraction, processing, and sales of mineral resources. Due to the unique nature of these operations, the mining industry faces specific transfer pricing challenges.

Owing to the high value of mineral resources, transfer pricing practices in the mining sector are closely monitored by tax authorities around the world. In recent years, international taxation of mining companies has come under intense scrutiny, giving rise to several prominent disputes within the industry.

Key Transfer Pricing challenges in mining

Key issues include the establishment of marketing hubs in low-tax jurisdictions, difficulties in comparing different commodities for pricing purposes, and managing complex value chains within MNE groups. These challenges are central to many global dispute resolutions in the mining sector where tax authorities aim to ensure fair profit allocation and compliance with international tax standards.

Marketing hubs

Invariably, a local mining company finds itself under scrutiny from tax authorities for its marketing and sales operations managed by an offshore subsidiary typically situated in a low-tax jurisdiction. The tax authority asserts that the offshore subsidiary's establishment is primarily to evade taxes in the host country, alleging that profits are being redirected through marketing hubs located in jurisdictions with favourable tax regimes. This example highlights the financial and reputational risks that mining companies face regarding their transfer pricing strategies, particularly when involving entities in low-tax jurisdictions. Such strategies are closely scrutinised by tax authorities, as they may perceive these arrangements as attempts to shift profits and minimise tax liabilities in the host countries where substantial economic activities take place.

As evidenced in the cases of BHP and Rio Tinto, transfer pricing issues related to marketing services often become contentious owing to the setup of entities in low-tax jurisdictions. These cases underscore the importance of ensuring that these entities have substantial operational activities and genuine economic substance.

The Organisation for Economic Co-operation and Development (“OECD's”) Base Erosion and Profit Shifting (“BEPS”) initiative, particularly Actions 7 and 9, address these concerns by ensuring that profits are aligned with economic activities and that entities assuming risks have the capacity to control these risks and are financially capable of doing so. In several marketing arrangements, ownership of goods is transferred to the marketing entity, thereby transferring associated risks. However, there are instances where the marketing entity lacks the capacity to independently assume or manage such risks, potentially leading to an overstatement of profit allocated to the marketing entity.

Tax authorities closely scrutinise these operations to verify that their activities align with economic realities and contribute genuine value, rather than merely serving as vehicles for tax avoidance. To ensure that a marketing entity in a low-tax jurisdiction is compliant from a transfer pricing perspective, several key actions must be considered:

  • The marketing entity must engage in substantial and meaningful business activities with local employees who perform significant people functions. It should not merely function as a conduit for transactions but should contribute to the overall business strategy and profitability of the MNE group.
  • The marketing entity must have the capacity to manage and control the risks associated with its operations. This means that the entity should have the authority to make critical business decisions and have the financial capability to bear the consequences of those decisions.
  • The profits allocated to the marketing entity must be proportionate to the value it creates within the group.

Comparability issues

Determining an arm's length price for mineral resources poses significant challenges due to the difficulty of pricing and measuring minerals accurately. Mineral resources vary widely in quality and composition which directly impacts their market value. For instance, the purity of gold or the grade of copper significantly influences their pricing making it difficult to find identical or similar transactions for comparison purposes.

Mining operations involve intricate extraction processes that differ based on geological conditions, technological advancements, and environmental considerations. The efficiency and cost-effectiveness of these processes vary, influencing the profitability and pricing strategies of mining companies.

Commodity prices are highly volatile due to global supply and demand, geopolitical events, and economic factors, making comparability challenging over time. Unquoted commodities present greater risks of mispricing. Even for commodities with quoted prices, ensuring arm's length evaluations requires careful consideration of contract terms such as treatment charges, transportation costs and applicable discounts. Therefore, finding exact comparables for commodity transactions is difficult, making the Comparable Uncontrolled Price (“CUP”) method challenging to apply accurately.

The 2023 OECD and Intergovernmental Forum (“IGF”) practice note, "Determining the Price of Minerals," provides guidelines for pricing mineral sales on an arm's length basis, emphasising key economic factors from the OECD Transfer Pricing Guidelines, 2022. Applying the CUP method requires considering product characteristics, economic circumstances, and contractual terms, thereby providing essential assistance in pricing commodities.

Nevertheless, due to the inherent challenges in accurately pricing and measuring minerals, MNEs must apply alternative methodologies and conduct comprehensive market analyses to robustly support their transfer pricing strategies.

Detailed Value Chain Mapping

Mining entities encounter significant challenges owing to their intricate and multifaceted value chains. The complexities arise from the diverse stages involved in mineral exploration, extraction, processing, and sales, each contributing distinct economic value and carrying specific operational risks. These value chains can span multiple jurisdictions with varying tax regimes and regulatory frameworks, further complicating the determination of arm's length prices. The functions performed, assets utilised, and risks assumed by entities at different stages of the value chain must be accurately delineated to allocate profits appropriately.

Moreover, identifying where significant people functions reside within the value chain and integrating high-value fixed assets in mining operations add layers of complexity to profit allocations and pricing strategies. Consequently, mining companies must adopt sophisticated transfer pricing methodologies and conduct comprehensive functional analyses to determine the relative contributions made by each entity to the overall business.


In South Africa, mining entities face challenges similar to global trends in dispute resolution. It is crucial to align profits with value creation under the arm's length principle, resolve comparability issues, conduct thorough functional analyses, and ensure commodity prices accurately reflect market conditions. Utilising Advance Pricing Agreements, enhancing transfer pricing documentation and optimising value chains are essential strategies for mining entities to effectively navigate transfer pricing challenges and maintain compliance with tax regulations.


Robyn Kantor

Tax Manager