Since 2008, the CRA has disputed Cameco’s offshore marketing company structure and its related transfer pricing methodology used for certain inter-company uranium sales and purchase agreements.
The CRA issued reassessment notices for the company’s tax returns from 2003 to 2008.
The case, based on the 2003 reassessment, is expected to go to trial at the Tax Court in 2015, with a decision expected by 2016.
“Transfer pricing is a complex area of tax law, and it is difficult to predict the outcome of a case like ours as there are only a handful of reported court decisions on transfer pricing in Canada,” the company said in a news release (see GSK, GE, McKesson and Alberta Printed Circuits).
“The majority of our customers are located outside Canada and we established an offshore marketing subsidiary. This subsidiary entered into intercompany purchase and sales agreements as well as uranium supply agreements with third parties,” the news release added. “We have arm's-length transfer price arrangements in place, which expose both parties to the risks and the rewards accruing to them under this portfolio of purchase and sales contracts.”
The company said the contract prices are generally comparable with established sales contracts between unrelated parties at that time. However, it added that it had recorded a cumulative tax provision of $75 million where “an argument could be made that our transfer price may have fallen outside of an appropriate range of pricing in uranium contracts for the period from 2003 to March 31 2014”.
The company has emphasised its confidence in being successful in its Tax Court trial and has made assumptions looking ahead that include:
· CRA will reassess us for the years 2009 through 2013 using a similar methodology as for the years 2003 through 2008, and the reassessments will be issued on an accelerated basis as described above;
· We will be able to apply elective deductions and tax loss carryovers to the extent anticipated;
· CRA will seek to impose transfer pricing penalties (10% of the income adjustment) in addition to interest charges and instalment penalties; and
· We will be substantially successful in our dispute with CRA and the cumulative tax provision of $75 million to date will be adequate to satisfy any tax liability resulting from the outcome of the dispute to date.
However, the company also lists risks that may cause actual results to differ materially.
If, for example, the CRA reassess Cameco for years 2009 to 2013 using a different methodology than the one it used for 2003 to 2008, or Cameco is unable to utilise elective deductions and loss carryovers to the extent it anticipates, the required cash payments to CRA, pending the outcome of the dispute, will be higher.
Additionally, there has been a time lag in the reassessments for each year in question.
Cameco said, in the event it was unsuccessful against the CRA, it would result in significantly higher cash taxes, interest charges and transfer pricing penalties than its cumulative tax provision and this would have a knock-on effect to the company’s liquidity, financial position, results of operations and cash flow.
