Public Disclosure Authorized Public Disclosure Authorized Transfer Pricing in Mining with a Focus on Africa Public Disclosure Authorized A Reference Guide for Practitioners January 2017 By Pietro Guj, Stephanie Martin, Bryan Maybee, Frederick Cawood, Boubacar Bocoum, Nishana Gosai and Steef Huibregtse Public Disclosure Authorized 1705352-Transfer_Pricing_In_Mining_CVR 3 1/25/17 11:09 AM Transfer Pricing in Mining with a Focus on Africa A Reference Guide for Practitioners Pietro Guj Stephanie Martin Bryan Maybee Frederick Cawood Boubacar Bocoum Nishana Gosai Steef Huibregtse January 2017 NOTES: 1—The interests of the International Mining for Development Centre (IM4DC) have since its closure being repre- sented by the Mineral and Energy for Development Alliance (MEfDA) between the two original IM4DC partners, namely the University of Western Australia and the University of Queensland. 2—The jacket map locating the main mineral deposits in Africa was provided by MinEx Consulting. 1705352-Transfer_Pricing_In_Mining_FM,PARTA.indd 1 1/25/17 11:24 AM Pietro Guj, Research Professor (corresponding author), The Centre for Exploration Targeting (CET), E-mail: pietro.guj@uwa .edu.au. Stephanie Martin, Consultant, previously Deputy Commissioner of Taxation, Australian Tax Office. Bryan Maybee, Research Professor, The Centre for Exploration Targeting (CET) and Senior Lecturer, Department of Mineral & Energy Eco- nomics, Graduate School of Business, Curtin University, Perth, Western Australia. Frederick Cawood, Professor and Head of the School of Mining Engineering, The University of Witwatersrand, Johannesburg, South Africa. Boubacar Bocoum, Lead Mining Specialist, World Bank Group’s Sustainable Energy, Oil, Gas and Mining Unit (SEGOM), Washington, D.C. Nishana Gosai, Manager Transfer Pricing (Large Business Centre), South African Revenue Services, Johannesburg, South Africa. Steef Huibregtse, Chief Executive Officer, Transfer Pricing Associates (Global) Amsterdam, The Netherlands. 1705352-Transfer_Pricing_In_Mining_FM,PARTA.indd 2 1/18/17 7:33 AM Contents Prologue ....................................................................................... ix Foreword ...................................................................................... x Acknowledgements ............................................................................. xii Disclaimer ..................................................................................... xiii Précis.......................................................................................... xiv 1. Introduction ........................................................................ 1 1.1 Needs Identification .............................................................. 1 1.2 Objectives and Nature of the Current Study ......................................... 3 1.3 Structure of This Guidebook ....................................................... 4 1.4 Outline of Transfer Pricing Principles and Methods ................................... 6 1.5 Transfer Pricing Is Only One Aspect of a Multifaceted Problem......................... 9 PART A THE MINING INDUSTRY AND TRANSFER PRICING 2. The Mining Value Chain ............................................................. 13 2.1 Mining Value Chain Analysis ...................................................... 13 2.1.1 Stages of the mining cycle and degree of vertical integration and implications for transfer pricing ..................................................................... 13 2.1.2 Transfer pricing as a management accounting method for intra- and inter-group customer-supplier transactions.................................................. 15 2.2 Typical Functions of the Mining Cycle .............................................. 16 2.2.1 General classification of related-party transactions in mining.......................... 16 2.2.2 Specific functions/activities involved at various stages of the mining value chain .......... 16 2.2.2.1 Acquisition and exploration stage................................................ 17 2.2.2.2 Mine construction and development stage ........................................ 18 2.2.2.3 Mining operations and concentration stage ....................................... 19 2.2.2.4 Transportation stage: Trucking/railing, port and shipping .......................... 19 2.2.2.5 Smelting and refining stage ..................................................... 20 2.2.2.6 Trading, marketing and sales functions ........................................... 21 3. Typical Mining Industry Transactions Potentially Involving Transfer Pricing .............. 22 3.1 Primary and Secondary Functions in a Fully Vertically Integrated Base/Precious Metals Producer ........................................................................ 22 3.2 Assets Utilized and Created in Various Mining Functions.............................. 24 3.3 Project, Market and Other Business Risks Typical of the Mining Industry ................ 28 4. Mapping of the Main Risk to Government Revenue Arising from Mispricing of Transfers in the Mining Value Chain ........................................................... 32 4.1 General Considerations ........................................................... 32 4.2 Risks Arising in Mining Operations................................................. 36 iii 1705352-Transfer_Pricing_In_Mining_FM,PARTA.indd 3 1/18/17 7:33 AM iv Transfer Pricing in Mining with a Focus on Africa 4.2.1 General considerations for the use of hubs for the supply of goods and services ............ 36 4.2.2 Marketing hubs .............................................................. 39 4.2.2.1 General characteristics of minerals products sales.................................. 39 4.2.2.2 Transfer pricing issues relating to marketing hubs ................................. 43 4.2.3 Corporate services hub......................................................... 50 4.2.4 Engineering, science and technical hub ........................................... 54 4.2.5 Insurance hub ............................................................... 60 4.2.6 Finance hub ................................................................. 62 4.2.6.1 Thin capitalization as a mechanism for shifting profits.............................. 67 5. Location and Structuring of International Businesses and Cross-Border Trade ............. 74 5.1 Attracting Investment in Mineral Exploration and Mining through Specific Fiscal Incentives................................................... 74 5.2 Criteria for Corporate Structuring and Location of Service Hubs........................ 75 5.3 Corporate Restructuring Is a Continuous and Dynamic Process ........................ 80 5.4 Double Taxation Agreements (DTAs) Issues Pertinent to Developing Countries........... 82 5.5 Treaty Shopping ................................................................. 85 PART B THE MINING INDUSTRY IN AFRICA AND TRANSFER PRICING 6. Characteristics of the African Mining Industry ......................................... 91 6.1 Economic Importance of Mining in Africa ........................................... 91 6.2 Current Status of Transfer Pricing Legislation and Administration in Africa ............. 93 6.2.1 Transfer pricing legislation . 93 6.2.2 Results of transfer pricing questionnaire .......................................... 95 6.3 Revenue and Cost Structure of African Mining Operations as a Basis for Identification of Transfer Pricing Risks .......................................................... 97 6.3.1 General considerations ........................................................ 97 6.3.2 Key commodities characteristics and their influence on cross-border transactions .......... 99 6.3.2.1 Global production and resource profiles for key commodities in Africa ............... 100 6.3.2.2 Current state of key commodity production in Africa............................... 102 6.3.2.3 Broad revenue and cost considerations ........................................... 106 6.3.3 Examples of transfer pricing issues emerging in the context of various commodities ........ 108 6.3.3.1 Precious metals: Some gold and a Platinum Group Metals (PGMs) examples .......... 109 6.3.3.2 Base metals: Copper products, pricing and case studies............................. 114 6.3.3.3 Iron ore products, pricing and case studies........................................ 122 6.3.3.4 Coal products, pricing and case studies........................................... 129 6.3.3.5 Diamonds and other gemstones ................................................. 133 PART C INSTITUTIONAL AND ADMINISTRATIVE CAPACITY 7. Transfer Pricing Administration, Compliance and Audits................................ 145 7.1 Compliance Process Overview ..................................................... 145 7.1.1 Phase 1—Who is of concern?—Case selection ...................................... 149 7.1.2 Phase 2—What issues do they present?—Risk assessment ............................ 152 7.1.3 Phase 3—Audit .............................................................. 153 7.1.4 Phase 4—Resolve issues ....................................................... 155 7.1.5 Process summary............................................................. 156 1705352-Transfer_Pricing_In_Mining_FM,PARTA.indd 4 1/18/17 7:33 AM Transfer Pricing in Mining with a Focus on Africa v 7.2 Availability of Transfer Pricing Analytical, Compliance and Auditing Skills and Resources ..................................................................
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