Transfer Pricing in Mining with a Focus on Africa: A Reference Guide for Practitioners

The number of extractive resources rich countries has steadily increased over the past quarter of a century, particularly in the case of low- to middle-income countries. Some estimate that by 2030 half of the global population living on less than two dollars a day will reside in extractive-driven countries. Capturing appropriate revenues from nonrenewable extractive resources is, therefore, of paramount importance for domestic income mobilization for developing countries, and a major potential source of poverty reduction and inclusive growth.

Considerations required to enforce mineral contractual agreements, especially as they relate to taxes, royalties and other mineral revenue streams have received relatively less attention in the past. This is changing with increasing research and publications on the subject, including by the World Bank Group and its partners, together with other stakeholders.

Specifically mining, which as an industry is broader and more diverse than oil and gas, has been expanding at a time when the multinational enterprises involved have been structuring their operations in ways that result in a spread of their functions, assets and risks across multiple related entities located in different jurisdictions. This trend, which is especially prominent in Africa and in countries with similar economic circumstances, results in value-adding activities moving away from the countries hosting the mining operations. As a consequence, the volume of goods and services provided through cross-border transactions between related entities expands, and the price charged for them demands more attention and proper assessment for tax calculation.

Many developing countries are yet to be fully equipped to deal with transfer pricing risks in general, and even less so for those associated with mineral commodities. This need for support motivated the World Bank Group (WBG), in cooperation with the International Mining for Development Center (IM4DC) of Australia and the Transfer Pricing Division of the South African Revenue Services (SARS), to develop this Guidebook to address how established transfer pricing principles for intragroup transactions could best be implemented in the context of the mining industry.

This publication identifies typical mining functions and activities and their associated assets and risks, and those amenable to related party transactions and related transfer pricing risks; investigates key commodities mined in Africa profiling their transfer pricing risks; provides sources of information to assist tax auditors to deal with the scarcity of relevant comparables; and discusses audits, capacity building and institutional methodologies and approaches to enhance compliance with payment of mineral taxes. It is a menu of options and possibilities that may be adapted to the individual circumstances of countries as they tackle their specific mining related transfer pricing challenges.

While this Guidebook is comprehensive in suggesting solutions to mining transfer pricing issues, its main messages have also been captured in a spinoff report for stakeholders other than tax administration professionals interested in contributing to the discourse on extractive tax collection administration. This Guidebook has also been the basis for the development of specialised training modules to be delivered through regional workshops to public, private and civil society stakeholders interested in the topic.

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