Lithium is crucial for electric vehicle batteries and renewable energy storage, making it a key metal in the energy transition. The rising demand for this metal is an important revenue opportunity for lithium-rich developing countries. However, revenue collection on lithium production is challenging as the product is sold in many forms, requiring price adjustments. Moreover, the sector is characterized by private transactions, which makes comparable prices difficult to access. The pricing challenges increase revenue risks related to transfer pricing, where related parties artificially manipulate transaction prices to avoid paying taxes and royalties in the county that hosts the mine. So, how can producing countries determine accurate prices to support fair revenue collection in the sector?
Navigating the pricing of minerals and metals poses significant challenges for tax authorities and mining companies, and disputes are common and costly. Lithium presents unique complexities for several reasons. First, lithium is traded in multiple forms—such as lithium carbonate, lithium hydroxide, spodumene concentrates etc.—each with its own unique pricing structure and reference prices. Second, many lithium transactions are conducted privately between buyers and sellers; in some cases, these parties are affiliated. This opacity makes it difficult to establish a uniform market price. It also hinders the ability to determine an “arm’s-length price,” one that unrelated parties would agree upon in an open market, which is needed for accurate taxation and revenue collection purposes.
Using Price Indices as Benchmarks
The lithium market is not yet as liquid and transparent as that of many metals traded on major commodity exchanges. For now, governments can use price assessments from price reporting agencies (PRAs) to access market prices. These prices are produced by neutral, independent entities that aggregate data from various market participants, such as producers, traders, and consumers. PRAs offer insights into the pricing of products like lithium carbonate, hydroxide, and, increasingly, intermediate products, such as spodumene concentrates. They also cover a range of minerals and metals beyond lithium, including cobalt and bauxite. While these price assessments are essential for comparing and validating prices—which is at the heart of transfer pricing rules to ensure fair pricing in transactions between related parties—they do not replace the need for arm’s-length pricing.
Governments can rely on independent lithium price assessments to verify prices, but these don’t replace the need for arm’s-length pricing.
It should be noted that the price assessments still reflect a developing market. Spot prices, which are based on a very limited number of transactions, are becoming more reliable as trading volumes increase and more data is available, particularly in key buyer markets like China, Japan, and Korea. In practice, contract prices may differ from these indices, especially due to differing contract terms and specific market conditions.
Adapting to Market Development
PRA assessments, therefore, serve as a useful starting point for price discovery purposes and should be complemented with up-to-date market data and a nuanced understanding of transaction specifics. When using them, governments should consider the OECD transfer pricing guidelines, which emphasize aligning prices based on the quality of the product and with current and specific market conditions. The lithium sector has varied commercial practices, and understanding these nuances is key for setting fair tax assessments that truly reflect the market. Policy-makers can use PRAs’ data; but they should keep up with market developments and adjust their price assessments accordingly, incorporating the latest market data and commercial terms.
As the lithium market evolves, so will the methodologies of these agencies, with new indices and improved assessments expected to enhance market transparency and accuracy, which will benefit governments, companies, and consumers alike.
Navigating the complexities of mineral pricing is vital for governments to ensure lithium contributes to government revenue and supports economic growth in producing countries. Many countries have started relying on benchmark prices to optimize tax and royalty revenues from minerals in opaque value chains, as the examples of Colombia, Senegal, and Guinea have shown. Independent PRAs are key actors in helping governments achieve accurate and fair pricing in tax and royalty calculations. Governments in lithium-producing countries have an opportunity to adopt robust transfer pricing approaches from the beginning. Organizations like the IGF and OECD provide advisory support to refine tax policies and practices and ensure fair, transparent revenue collection from this vital resource.
Thomas Lassourd leads the IGF’s work on tax and extractives. Jaqueline Taquiri is a Policy Advisor specialized on tax and extractives with the IGF. Andrew Viola is a Senior Advisor in the Transfer Pricing and Financial Transactions Division at the Organisation for Economic Co-operation and Development (OECD).