“The most useful topic for me was pricing of different types of coal using the world market price database. In Mongolia, underpricing of coal in transactions both with related parties and independent parties is a common issue.”
In the mining sector, royalties and income taxes are usually levied on the price received for the minerals produced multiplied by the volume. The price might be the actual sale price received or a relevant quoted price, if there is one. Government revenue thus depends on mineral products being priced and measured accurately.
However, pricing is not always straightforward. It may be complicated by the different stages of mineral beneficiation, the lack of publicly quoted prices for some minerals, and any adjustments based on the quality or grade of the product, as well as deductions for transport and insurance costs.
These factors can be even more complicated in the case of related-party sales, where there is an incentive to set artificially low prices to reduce taxable income in the mining country and shift profits offshore.
Unless governments are confident that the values declared by companies are accurate, suspicion and doubt will continue to erode trust between government and industry, which in turn affects companies’ social licence to operate. And if the value is being under-reported, governments can lose millions in tax revenues.
Our practice note outlines three main policy options for governments looking to improve their oversight of mineral export value: direct measurement of mineral exports, monitoring mining companies’ own internal export valuation processes, and a hybrid approach. Whichever policy is employed, it should stand up to legal scrutiny.
We are also providing capacity building for governments on the pricing of specific mineral products, including bauxite, coal, copper, and manganese.