IGF guidance is forthcoming on these topics.
Hedging
The Challenge
Hedging is a legitimate business practice in many commodity markets. It consists of locking in a future selling price so both parties to the transaction can predictably plan their commercial operations. Resource-rich governments should not expose themselves to the risks of speculative foreign exchange hedging operations.
A problem arises when companies engage in abusive hedging with related parties. They can use hedging contracts to set an artificially low sale price for their products and therefore record systematic hedging losses, reducing their taxable income.
Want More?
- OECD – Aggressive Tax Planning Based on After-Tax Hedging
- SAIMM – Hedging Gold Production: An analysis of historical South African gains and losses
- Publish What You Pay Norway – Protection from Derivative Abuse
Metals Streaming
The Challenge
Metals streaming involves mining companies selling a certain percentage of their mineral production at a fixed cost (both an upfront payment and a fixed price per unit of metal delivered) to a financier in return for funds for mine development and construction, debt refinancing, or the expansion of capital.
Since the amount of financing provided is usually linked to discounted mineral prices, companies have strong incentives to agree to lower fixed prices to increase the upfront finance available, as the financier can then sell the minerals for a higher profit. Streaming may reduce the tax base of resource-producing countries.