Assessing Transfer Pricing Risk in the Mining Industry – How BEPS Is Changing the Landscape

By Lori Whitfield, CPA, CMA, MA, Jarret Robertson, Mtax, and Matt Isberg, MA; published in CPABC in Focus
Published: July/August 2016

Mining companies have global operations and face unique tax challenges from a transfer pricing perspective. With the introduction of the OECD/G20’s Base Erosion and Profit Shifting (BEPS) Project in 2013, these challenges are likely to intensify. As the BEPS guidance is implemented globally, mining companies will face greater scrutiny with respect to their intercompany transactions and a greater risk of disputes with tax authorities.

The BEPS Project is based on the OECD[1] Action Plan endorsed by the G20 in July 2013, which identified key actions needed to address BEPS. The final BEPS package, which includes 15 “BEPS Actions,” was presented to and endorsed by the G20 finance ministers and G20 leaders in October and November of 2015, respectively.

In Canada, the recent federal budget made it clear that our government is taking concrete steps towards adopting the guidance put forth by the BEPS Project, which will ultimately reshape this country’s tax landscape.

This article focuses on the transfer pricing issues currently faced by mining companies, and assesses the risks arising in this industry due to the BEPS Project.

Current court cases

The international taxation of mining companies has moved into the spotlight in recent years as several material disputes have surfaced in the industry.

At the time of this writing, the Canadian uranium miner Cameco is under audit by the Canada Revenue Agency (CRA) for marketing and sales activities carried out by its Swiss subsidiary. The CRA contends that the Swiss subsidiary was set up for the purpose of avoiding taxes in Canada. The amount of tax at stake could be as high as C$1.6 billion, and the dispute has been well publicized.[2]

Similarly, Australian mining companies BHP and Rio Tinto are under audit by the Australian Taxation Office for allegedly shifting profits through their marketing hubs in Singapore. Both companies have recorded several billion dollars of profit in these marketing hubs, on which they have paid minimal tax.

In 2013, Vale, a Rio de Janeiro-based mining company, agreed to pay US$9.6 billion to the Brazilian government after settling a decade-long dispute over corporate taxes on income attributed to its non-Brazilian subsidiaries.[3]

These examples highlight the financial and reputational risks mining companies face with regard to their transfer pricing policies. Globally, tax authorities have already started to rely on BEPS guidance, but many companies have not taken adequate steps to address the current transfer pricing environment.

Impact of BEPS

The 15 BEPS Actions address key areas that have challenged governments in taxing profits generated by multinational entities (MNEs) within their borders. Identified below are specific areas of heightened BEPS-related risk for the mining industry, as well as potential opportunities arising from the BEPS Actions.


As seen in the cases of BHP and Rio Tinto, transfer pricing for marketing services can be contentious. With the introduction of the BEPS Project, these services will face even greater scrutiny from tax authorities.

BEPS Action 9, which introduces guidance aimed at preventing MNEs from shifting profits by inappropriately transferring risks among group members, will directly affect intercompany marketing arrangements. Under the guidance in Action 9, companies that assume risks should be the ones controlling these risks and must be financially capable of assuming them.[4]

In many marketing agreements, the title of the goods is passed on to the marketing entity—a process that transfers risks (e.g., market risk). In certain cases, however, the marketing entity is not capable of assuming or controlling this level of risk on a stand-alone basis, which may result in an overstated allocation of profit to the marketing entity. With the introduction of BEPS Action 9, situations such as this one may pose significant risks for MNEs, so intercompany marketing arrangements need to be reviewed in the context of the guidance put forth by Action 9.


Mining companies may find that intercompany financing is particularly challenged under the BEPS Project. In the BEPS Action 4 report, the OECD released guidelines on preventing BEPS by limiting the tax deductibility of interest payments. The report recommends that each country set a limit on the level of net deductions for an entity’s interest payments to a percentage of its earnings before interest, taxes, depreciation, and amortization.[5] Any interest expenses beyond this limit would not be deductible for tax purposes and, as a result, could be subject to double taxation.

Mining companies routinely lend money to their operating subsidiaries in foreign countries where the interest on the debt is deductible. In many cases, the interest paid by operating subsidiaries exceeds the deductibility limit set by the country in which they operate. Developing projects could be significantly affected by the provisions in Action 4 due to their lower earnings and need for significant funding. Mining companies need to pay close attention to the implementation of Action 4 in their operating jurisdictions, and should pay particular attention to jurisdictions where they are using financing structures to lower their effective tax rate, given that several BEPS actions, including Action 4, could affect these tax structures.

Long-term supply agreements

Long-term supply agreements are under scrutiny from tax authorities, as indicated by the CRA’s audit of Cameco. In 1999, Cameco entered into an intercompany agreement with its Swiss marketing hub for the purchase of uranium; this locked in the price of future transactions at 1999 market rates for the next 17 years.[6] During that time, the price of uranium increased substantially, leading to significant profits for the Swiss subsidiary.

With the introduction of BEPS Action 10, which deals with profit shifting through intercompany transactions that would not typically occur between third parties, tax authorities are likely to focus more closely on the long-term supply agreements of mining companies. Included in the report on Actions 8, 9, and 10 is new guidance specifically related to the handling of commodity transactions.[7] Within this guidance are new recommendations for determining the pricing date for commodity transactions; these recommendations are designed to prevent taxpayers from using pricing dates in contracts to purposefully adopt the most advantageous quoted price.[8] Many contractual commodity pricing structures, such as the one used in the Cameco agreement, could be significantly affected by these changes.


The new guidance on intangibles that was introduced with BEPS Action 8 presents potential opportunities for mining companies to lower their effective tax rates. Action 8 discusses the return on intangibles in the context of development, enhancement, maintenance, protection, and exploitation—commonly referred to as the “DEMPE” functions. Specifically, the Action explains that an entity’s compensation from intangibles should correspond to its functions performed, assets contributed, and risks assumed in relation to the DEMPE functions.[9]

In the mining industry, many aspects of these functions are performed by the head office. The new guidance in Action 8 may provide greater support for Canadian-based mining MNEs to compensate their Canadian head offices for undertaking research and development and for developing intangibles used by their foreign operating subsidiaries. Given the taxable position of many Canadian mining companies, this opportunity to reallocate income could be beneficial from a tax perspective.

Country-by-country reporting

The introduction of BEPS Action 13 will expose MNEs’ key transfer pricing metrics to tax authorities.[10] Action 13 requires large MNEs to provide information with respect to their global allocation of income, economic activity, and taxes paid among countries to all relevant governments.[11] The new information requirements give tax authorities a full picture of a mining company’s international value chain and make apparent any misalignments between income allocation and value creation—for example, a marketing entity with excessive profits and few employees, or an overly aggressive financing structure.

Implementation of country-by-country reporting was proposed in Canada’s 2016-2017 federal budget and is expected to take effect for taxation years after 2015.

Knowledge is key

Given the magnitude of transfer pricing issues currently faced by mining companies and the heightened level of scrutiny on transfer pricing due to the BEPS Project, companies need to become increasingly proactive in assessing transfer pricing risk. CFOs, tax executives, treasury groups, and other relevant management should ensure that they are familiar with the guidance in the BEPS reports, and understand how this guidance is relevant to their company and its related-party transactions.

Lori Whitfield is a transfer pricing partner with Deloitte Vancouver, specializing in transfer pricing planning, documentation, and tax controversy.

Jarret Robertson is a transfer pricing manager with Deloitte Vancouver, specializing in intercompany financing transactions, quantitative modelling, and tax controversy.

Matt Isberg is a transfer pricing analyst with Deloitte Vancouver, specializing in economic and econometric analysis relating to transfer pricing issues.


  1. Organisation for Economic Co-operation and Development (
  2. Peter Menyasz, Bloomberg BNA (2015), “Canadian Appellate Court Directs CRA to Provide Arm’s-Length Price in Cameco,” 24 Transfer Pricing Report 255, page 1.
  3. Juan Pablo Spinetto, “Vale to Pay $9.6 Billion to Settle Decade-Long Tax Fight,” Bloomberg, November 28, 2013.
  4. OECD (2015), Aligning Transfer Pricing Outcomes with Value Creation, Actions 8-102015 Final Reports, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing (page 33).
  5. OECD (2015), Limiting Base Erosion Involving Interest Deductions and Other Financial Payments, Action 4 – 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing (page 25).
  6. Geoff Leo, “Ottawa accuses Cameco of multi-million dollar tax dodge,” CBC News, September 19, 2013. (
  7. OECD (2015), Aligning Transfer Pricing Outcomes with Value Creation, Actions 8-10 – 2015 Final Reports, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing (page 51).
  8. Ibid, page 54.
  9. Ibid, page 73.
  10. OECD (2015), Transfer Pricing Documentation and Country-by-Country Reporting, Action 13 – 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing.
  11. MNEs with total consolidated group revenue of less than €750 million (or a near-equivalent amount in domestic currency) would not be subject to country-by-country reporting under the OECD’s Transfer Pricing Documentation and Country-by-Country Reporting, Action 13 – 2015 Final Report.

Base erosion and profit shifting defined

From “[BEPS] refers to tax planning strategies that exploit [gaps] and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid. BEPS is of major significance for developing countries due to their heavy reliance on corporate income tax, particularly from [MNEs]. Research undertaken since 2013 confirms the potential magnitude of the BEPS problem. Estimates conservatively indicate annual losses of anywhere from 4-10% of global corporate income tax (CIT) revenues…”

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