As part of the ongoing work of the OECD’s Centre for Tax Policy and Administration and the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF) in relation to the BEPS in Mining Programme, the OECD and IGF opened a session of public comments on the proposed new toolkit designed to support developing countries in addressing the transfer pricing challenges faced when pricing minerals.
This toolkit builds on Determining the Price of Minerals: A Transfer Pricing Framework and applies its transfer pricing principles specifically to the pricing of copper.
Together with multiple experts across the world, BaseFirma provided technical comments in which we focused on the compensation for a related-party trader by proposing the following framework:
- Conduct a Functional Analysis: First, thoroughly analyze the transaction to understand the specific functions performed, assets used, and risks assumed by the trader to determine its economic role.
- Review potential comparable data: Next, look for data from independent deals, such as commissions or margins earned by third-party resellers. These can serve as references and allow for the triangulation of results.
- Recognize the Trader’s Role: The trader’s role exists on a spectrum, from a low-risk agent to a fully-fledged entity that takes ownership of the mineral and assumes significant commercial risks (e.g., price fluctuations). The compensation must match the level of risk assumed.
- Value the Assumed Risk (when applicable): The main challenge is finding comparable market data to value the risks a fully-fledged trader takes on, as this goes beyond valuing the comparatively simpler marketing tasks of an agent. If needed, it is possible to employ mathematical modeling, i.e., quantitative tools like Monte Carlo simulations to model the financial impact of the risks transferred (to the trader). This can provide a robust method for calculating the appropriate compensation for the entity bearing those risks.
Reach out to paul.valdivieso@basefirma.com with any questions or comments.
Link to the proposed framework and all the comments:
Determining the Price of Minerals: A transfer pricing framework for copper