By Kabir Jamal, Goodmans LLP, Toronto
Cameco paid arm’s length prices on intercompany transfers of uranium to a wholly-owned Swiss subsidiary pursuant to long-term intercompany contracts, Canada’s Tax Court ruled on September 26, in a closely watched transfer pricing case.
Beginning in 1999, Cameco Corporation (Cameco), a Canadian corporation and the world’s largest publicly traded uranium company, entered into a series of long-term contracts for the sale of uranium to its wholly-owned Swiss subsidiary (Swissco).
Pricing under the long-term contracts was either fixed, base escalating, market-based, or a hybrid of base escalating and market-based, but in the latter three cases prices were only partially adjusted to reflect changes in the uranium spot price.
Cameco also guaranteed certain long-term contracts entered into by Swissco for the purchase of Russian-source uranium from a third party. When the spot price for uranium subsequently increased dramatically, Swissco sold the uranium to a wholly-owned US subsidiary of Cameco (USCo), which in turn on-sold the uranium to third-party customers outside Canada.
The price paid by USCo to Swiscco for the purchased uranium was 98% of the purchase price charged by USCo to its customers.
As a result of the foregoing arrangements, Swissco realized substantial profits from the resale of uranium.
The Canadian Revenue Agency (CRA) later reassessed Cameco for its 2003, 2005, and 2006 tax years to effectively attribute to Cameco the foregone profits for the purposes of computing its Canadian income tax liability.
Although the case before the Tax Court only involved three tax years, the CRA had also reassessed Cameco on the same basis for subsequent tax years, such that Cameco’s potential tax exposure would have been approximately CAD 2 billion (≈ USD 1.5 billion) in taxes, plus interest and penalties.
The CRA defended the reassessments on two grounds. First, the CRA took the position that the intercompany purchase and sale agreements were a sham and should be disregarded.
The CRA argued that all of the important functions and all of the strategic decisions in respect of the Cameco group’s uranium-trading business were performed and made by Cameco in Canada, and the intercompany transactions merely created the illusion that Swissco was engaged in a uranium-trading business in its own right.
The CRA also argued in the alternative that the transactions entered into between Cameco and Swissco (or the terms and conditions thereof) differed from the transactions (or the terms and conditions) that would have been entered into between arm’s length persons, and that Canada’s domestic transfer pricing rules should be applied to allow the CRA to disregard the transactions or revise their terms and conditions so as to shift Swissco’s profits to Cameco.
The Tax Court rejected both of the CRA’s grounds for reassessment.
In a lengthy 286-page judgment, the Tax Court conducted a careful review of the relevant facts and applicable law and concluded that the transactions were not a sham and did not violate the arm’s length standard contained in Canada’s domestic transfer pricing rules.
The CRA has 30 days from the date of the judgment to initiate an appeal to the Federal Court of Appeal.
Unless overturned on appeal, this decision will provide much-needed clarity to multinational enterprises in Canada on the proper application of Canada’s domestic transfer pricing rules.
– Kabir Jamal is an associate in the Tax Group at Goodmans LLP, Toronto, and can be reached by email at [email protected] or by telephone at 416.597.5161. Kabir has experience in a wide variety of domestic and international taxation matters, including mergers & acquisitions, corporate reorganizations, corporate finance, tax litigation, and dispute resolution as well as trusts and estates.
I cannot imagine the logic that may have gone into this ruling by the Tax Court. Would you please tell me where I could go to read that 286 page ruling?