Is the application of the arm's length principal the best method to address transfer mispricing in the mining industry in developing countries?

Tax revenue in developing countries has the potential to reduce poverty and strengthen the social contract between government and citizens. The mining sector in developing countries can represent one of the most significant opportunities for the generation of domestic revenues. However, due to their dependence on corporate income tax, developing countries are the most vulnerable to transfer mispricing. The 'Arm's Length' Principle has been proposed as the international standard to address transfer pricing.

 

In a recently published paper in The Extractive Industries and Society Journal our Head of Research evaluates the practical implementation of the 'Arms Length' Principle method in developing countries for mining transactions and compares it with several alternative methods. These methods include 'the sixth method,' Global Formulary Apportionment, Safe Harbours and Advanced Pricing Agreements. 

 

The paper illustrates the challenges of using relevant domestic comparables, the capacity to administer the 'Arms Length' principle, and the dependence on receipt of a large amount of information. The study illustrates the importance of a method which aligns profit with the economic activity which produced that profit while ensuring that developing countries are practically able to implement the technique with complex industries such as mining. 

 

The paper argues that the use of alternative methods, such as Safe Harbours and Advanced Pricing Agreements, in conjunction with the 'Arm's Length Principle' would support countries to realise the opportunities for domestic revenue from their mineral assets. The paper also argues for the use of the sixth method for transactions involving finished products. 

 

The paper, published by the Extractive Industries and Society Journal can be read here if you have journal access or alternatively please contact info@twooceansstrategy.com for a copy of the paper.