Powering through uncertainty: TP lessons from price volatility in the ERI sector

In recent months, the world has been beset by a number of surprising events and shocks, none more so, perhaps, than the tremendous price volatility exhibited by key commodities.

The public generally pays the most attention to the volatility of energy commodities. These tend to drive the prices they see every day as the final consumers of products core to everyday life, such as heating oil, motor fuel, gas, or electricity. The volatility of other natural resources such as gold, copper, and steel has been equally marked but perhaps perceived as less so by the general public, as these products are rarely directly consumed by individuals.

This trend is illustrated by the below diagram, which shows the volatility associated with a variety of commodities in the past 10 years, with January 2020 prices set at 100 to offer an ‘old world’ reference point.

This article looks at how these volatile times have impacted the transfer pricing (TP) policies applied by participants in the energy, resources, and industrials (ERI) sector.

This is an important subject for several reasons.

Firstly, as price shocks originating in the ERI sector affect many other parts of the modern economy (think banking or technology), looking at how the TP of ERI multinational enterprises has changed potentially offers useful insights to other industries.

Secondly, commodity pricing tends to be cyclical in nature – hence lessons learnt from pricing patterns now will have enduring benefit and can potentially be leveraged when the pattern we see now comes round again in due course.

Thirdly, as the ERI sector has high barriers to entry and massive economies of scale, it has been historically dominated by relatively few multinational enterprises operating on a global scale. This has tended to require a large number of transfer prices and resulted in a fertile environment for tax authorities to challenge. This area is therefore likely to be the focus of enquiries and litigation for years to come.

This leads us to the conclusion that there are material TP lessons likely to be found in analysing the impact of the recent volatility in the ERI space, and that such lessons might be of broader interest to other sectors.

Given the importance of the topic at hand and its complexity, this article approaches the key elements in a structured manner. It starts by looking at what has changed in the past five years or so (section 2) and outlines why and where existing TP approaches are under pressure now (section 3). This allows us to see where disputes and challenges are emerging, the tax authorities’ key focus areas (section 4), and, to conclude, what this means in terms of practical implications (section 5).

In the middle of the last decade, ERI markets were relatively stable following the end of the last commodity super-cycle. Since that time, however, as set out in the preceding section, a high degree of price volatility has materialised.

Interestingly, this market-driven volatility has been accompanied by a wealth of guidance and new requirements with respect to tax and TP.

Leading the way we had the ERI-specific, TP-focused United Nations Handbook on Selected Issues for Taxation of the Extractive Industries by Developing Countries (2017). This set out the following key TP risk areas for commodity TP:

• Fragmentation of the supply chain; in particular, with respect to:

  • Marketing/procurement companies or branches; and

  • Offshore hedging companies.

• Fragmentation of transactions.

• Thin capitalisation.

• Intra-group charges (e.g., technical fees and management fees).

• Offshore marketing companies holding customer relationships, smart contracting, and providing high-quality services.

The United Nations (UN) was not alone, however, in producing more guidance on commodity TP. An experienced TP practitioner will immediately recognise that every single one of the UN’s areas of risk have also been addressed by the OECD (predominantly as part of the BEPS programme). Indeed, of particular relevance to commodity TP was the following:

• Specific wording around commodity comparable uncontrolled prices (CUPs) being added to chapters I–III of the 2017 OECD Transfer Pricing Guidelines for MultinationalEnterprises andTax Administrations; and

• Specific wording around hedges (and split hedges) being added with the introduction of Chapter X in 2020.

Finally, there have been a number of other pieces of sector-specific guidance from other major global stakeholders. There have been several commodity-specific publications by a joint initiative called Platform for Collaboration on Tax launched in April 2016 by the OECD, the World Bank, the UN, and the IMF, including publications on iron ore, thermal coal, gold, copper, and related commodities (such as construction).

The ERI industry has faced many new and unexpected challenges arising from the aforementioned environment and has responded in its own unique way, often by challenging precedents and inventing new approaches. Four challenges are explored below.

Firstly, market volatility reached such new highs at one point that we saw the emergence of negative prices (most notably in April 2020, where the US West Texas Intermediate futures contract plunged to -$37.63 per barrel (see “The historic oil price fluctuation during the Covid-19 pandemic: What are the causes?”, Thai-Ha Le, Anh Tu Le, and Ha-Chi Le, Research in International Business and Finance). These negative prices reflected a sudden shortage of physical storage infrastructure, which dramatically highlighted that the market puts a substantial premium on the infrastructure needed to operate and realise profits (see next point also). However, the very fact we saw negative pricing forced many taxpayers to review how market prices or indices should be incorporated into their TP policies. This is the first useful lesson from that bout of volatility – not all market prices (e.g., indices) are created equal in terms of liquidity and ease of market access. It follows that not all CUPs are reliable market indicators. While market access and liquidity might not have been an issue in ‘business as usual’ times, they can create material TP problems when markets are volatile.

Secondly, the material intrinsic profit that was able to be realised by market participants holding relevant physical infrastructure became a common theme in the ERI industry at this time. The value of such ‘real’ assets has accordingly increased as more of them become cross-border or mobile (interconnectors, pipelines, vessels) and cross-border transactions become possible (e.g., to store commodities across borders, such as gas or power). This is another useful lesson from the recent period of volatility – higher price uncertainty drives the value-add of assets that are unique and valuable in the sense that they allow for the exploitation of those price swings.

Thirdly, volatility has resulted in high profits for many in the sector; in particular, the commodity traders. This high level of profitability has led tax authorities to seek to understand where real value has been created, who has made key decisions to take on or lay off risk, and how the volatility has been harnessed to generate revenues. This has put pressure on many industry precedents, especially the notion of charging for services at cost.

Fourthly, the recent price volatility had the effect of triggering material hedging profits or losses. This put pressure on a number of global hedging TP policies, especially for commodities that had been historically hedged centrally. If such hedges are in-the-money/pay-out and have been separated from the physical exposure to be hedged out, pressure may well be exerted on the loss-making entity. Where it suits them, there have been many instances of tax authorities challenging the hedges being split and taxed away from the entrepreneur that led to the risk being hedged. This offers an additional TP lesson that might not have been present when hedging profits/losses were not so pronounced.

Perhaps the most interesting consequence of the increased volatility is the emergence of entirely new types of intercompany transactions. These were triggered by:

• A new demand – in particular, one notes power purchasing agreements (PPAs) for groups to secure power needed for production (and increasingly AI data centres); or

• New supply – in particular, battery energy storage systems (BESS) and their associated transactions are relevant.

It was perhaps inevitable that the combination of extreme commodity price volatility and a substantial increase in commodity TP guidance has resulted in steady growth in the volume of TP controversy globally. This is perhaps best demonstrated by the tremendous increase in the number of TP cases that reference commodities, as set out in the diagram below.

The cases that have come to pass in recent years have been varied but follow a few core themes. Some of the more interesting are summarised below.

Despite (or perhaps because of) how much was written about Canada v Cameco Corporation (Federal Court of Appeal, June 26 2020), there are a couple of good reasons to start the outline of relevant controversies with this case.

Firstly, it perfectly illustrates how difficult the TP for ERI really is – the dispute went on for more than a decade, the hearings lasted months, and both sides called more than 10 witnesses.

Secondly, it focuses on the people-based part of the ERI market, which is where most of the controversies in the sector tend to occur. This is a constant theme that is unlikely to change.

Last but not least, the dispute centred on the profit increases that the parties to the transaction did not know would occur at the time they entered into the transactions. In the years of high volatility, every commodity-related transaction will have one party where such a challenge can be made.

An interesting ERI-specific issue concerns the recharge of costs to upstream assets operated by the taxpayer. This is a technical term describing a third-party arrangement where one coventurer manages daily operations, usually in an oil and gas upstream project. What is relevant from a TP perspective is that the operator typically recharges its costs to other coventurers at cost; i.e., without an explicit profit mark-up. These were historically an industry standard, but it is possible to see tax authorities ready to challenge that standard. Two cases with opposing conclusions are explored below.

Shell India Markets Pvt. Ltd. provided various project and technology services (e.g., geological and reservoir engineering, IT, project management) to its related parties. The recharges to the group’s upstream exploration and production (E&P) were done at cost.

Local tax authorities disagreed and assessed the taxpayer for additional tax assessed under the TNMM net cost-plus model. The taxpayer appealed to the Mumbai Income Tax Appellate Tribunal, which agreed with the taxpayer and allowed at-cost recharge to the E&P business in a ruling handed down on November 19 2025.

In reaching this conclusion, the tribunal considered:

• The production sharing contract framework;

• The behaviour of other independent parties;

• Expert opinions; and

• The absence of truly comparable third-party uncontrolled transactions for such specialised services.

Taken together, these points put forward the argument that recharges with a profit element are not an absolute requirement under the OECD guidelines, especially since third parties often agree to at-cost recharge.

A different view was presented in a 2023 Danish case where A.P. Møller – Mærsk A/S and TotalEnergies EP Denmark A/S (formerly Maersk Oil and Gas A/S, or MOGAS) conducted preliminary feasibility studies for oil exploration worldwide and provided technical and administrative services to its subsidiaries in Algeria and Qatar.

MOGAS issued performance guarantees for these subsidiaries but did not receive compensation for the studies or guarantees. The only intercompany compensation was reimbursement for technical and administrative assistance at cost.

The tax authority disagreed and the case reached the Supreme Court, which supported the tax authority.

It is often said that it is difficult to make predictions, especially about the future (see “Editorial: It’s Difficult To Make Predictions, Especially About the Future: Risk Calculators Come of Age in Child Psychiatry”, Daniel P. Dickstein, Journal of the American Academy of Child & Adolescent Psychiatry), and TP is no exception. However, if the authors had to guess, they would predict that more of the same TP challenges are in store for the ERI sector. There are several reasons for that prediction.

Firstly, if one were to look at a longer time horizon than the past five to 10 years and analyse the real (as opposed to the nominal) prices, we see a consistent pattern of peaks and troughs – the current volatility and high prices appear not so much unprecedented but simply one cycle among many.

In fact, the world of the 1960s–1980s was arguably equally as unstable as today. The diagram below illustrates this point clearly. So perhaps the key lesson from the past few years is that volatility peaks are a consistent feature of the ERI sector and we were just lucky to enjoy a few years of relatively stable pricing beforehand. This means that TP lessons from the recent period of volatility are likely to be useful in the future as volatility will come again.

Secondly, even if the prices of all natural resources revert to the previous period of stability of the late 2010s, an ageing working population globally and the impact of new technology on employment may well mean that the fiscal pressure on governments will endure. This will likely result in increased pressure on state revenue, which will translate into fiscal scrutiny of the TP policies of ERI market participants.

Finally, the ERI sector-specific TP guidance is here to stay. Even when markets are stable in the ERI sector, the most recent publications will give tax authorities plenty of points to argue or new approaches to put forward.

As for where this scrutiny is likely to focus, the authors wonder if two areas in particular may draw disproportionate attention.

The first is transactions where profitability changes a great deal with market volatility. These may be selected for closer inspection. This means tax authorities may spotlight transactions related to marketing/supply, hedging, and infrastructure.

The second area is transactions that are new and have materialised in large part because of the current volatility. This means PPAs, BESS, and any other new technology/commodity where little information on market pricing exists may see challenges (simply because there is rarely a third-party transaction to refer to).

In short, while we may look back on this period as one of great challenge, great misery, or perhaps great opportunity, it is clear that we should learn all the lessons we possibly can – the era of price volatility in the ERI industry is not at an end.

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