On August 12, 2024, the Organisation for Economic Co-operation and Development (OECD) and the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF) released a report titled “Determining the Price of Minerals: A Transfer Pricing Framework for Lithium.” This report addresses the challenges of establishing fair pricing for lithium, a crucial component in the burgeoning electric vehicle (EV) sector.
This new publication builds on the foundation set by the 2023 framework outlined in “Determining the Price of Minerals: A Transfer Pricing Framework”. Specifically tailored to lithium brines and minerals, the report is designed to support developing countries in effectively taxing lithium exports. It provides an in-depth analysis of the lithium market, including production processes and pricing mechanisms, offering practical guidance for tax authorities and multinational corporations engaged in the lithium trade.
Overview of the New Pricing Schedule
The latest schedule complements the previous practice note by detailing how the general mineral pricing framework applies specifically to lithium. It illustrates the use of the comparable uncontrolled price (CUP) method to determine lithium prices in related-party transactions. Importantly, this schedule does not modify or replace the OECD Transfer Pricing Guidelines (TPGs) from 2022 or the OECD Model Tax Convention’s Article 9 interpretation. Instead, it aims to fine-tune the application of these guidelines to the unique context of lithium pricing.
Framework for Pricing Lithium
To establish fair pricing for lithium, the report recommends using the CUP method, which involves comparing the price of related-party sales to those of independent transactions under similar conditions. The OECD TPGs specify critical comparability factors, three of them being:
- Product Characteristics: This includes the physical attributes and quality of the lithium product.
- Economic Circumstances: The market conditions and economic environment at the time of the transaction.
- Contractual Terms: The formalized specifics of the transaction, such as quantity, transportation, payment terms, and any associated costs.
The framework assumes that the associated mining enterprise, as part of a multinational group, benefits from extensive market knowledge and intelligence. This insight should guide the enterprise to price lithium at a level that reflects its market value, factoring in the group’s global perspective.
Product Characteristics
There are differing physical attributes and qualities of lithium products derived from brine deposits and hard rock minerals. Lithium from brine sources, such as those found in the Salar de Atacama in Chile or the salars of Argentina and Bolivia, typically results in lithium carbonate, which is further refined to produce lithium hydroxide. The quality and purity of the lithium product can vary depending on factors like the concentration of lithium chloride in the brine and the presence of impurities such as magnesium. In contrast, lithium extracted from hard rock minerals, particularly spodumene in Australia and China, usually contains a higher concentration of lithium oxide (1% to over 4%) and is comparatively easier to process. This results in a product with different chemical characteristics, which may necessitate distinct processing methods to yield lithium carbonate or lithium hydroxide. These differences in source material, processing complexity, and resultant product quality are critical when establishing comparability for transfer pricing, as they directly impact the market value and transfer pricing considerations of the lithium product.
Economic Context and Market Dynamics
The lithium market is influenced by the transition to clean energy and the rising demand for electric vehicles. This has led to the establishment of price assessments for lithium carbonate and lithium hydroxide. From a transfer pricing standpoint, these assessments allow tax administrations to account for fluctuations in global supply and demand by referring to historical price data relevant to the transaction period.
The market structure also plays a crucial role in pricing. Historically dominated by a few key players such as Albemarle, Sociedad Quimica y Minera de Chile, and Livent Corporation, the industry now includes new entrants like China’s Tianqi Lithium and Allkem from Australia. Recent developments, such as the merger of Livent and Allkem, are expected to create a significant market influence, potentially impacting lithium prices.
Similarly, the structure of consumption entities—such as major battery manufacturers and cathode producers—affects market dynamics. Governments’ strategic interventions to secure battery supply chains further influence prices.
Production history and mine size are also relevant factors. Established mines with a track record of stable production may command a price premium. In contrast, new or smaller mines might offer discounts to attract buyers, with prices expected to normalize as these mines gain credibility.
Contractual Considerations
The report highlights the importance of contractual terms, particularly transportation responsibilities. The cost implications of transportation—whether the product is sold CIF (Cost, Insurance, and Freight) or FOB (Free on Board)—must be considered. Most reliable price assessments are available for markets in East Asia, including China, Japan, and Korea. When using these assessments, tax administrations should account for transportation costs from the border to the delivery point specified in the price assessments.
Conclusion
The OECD and IGF’s new framework for pricing lithium is a step towards fairer taxation for developing countries. By applying the CUP method and considering various comparability factors, tax administrations can better ensure that lithium transactions are taxed appropriately. This framework provides a structured approach to addressing the complexities of lithium pricing. For detailed insights and guidance on applying this framework, refer to the full report and schedule released by the OECD and IGF.
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