The Tax Court of Canada has ruled in favour of Cameco in its massive tax dispute with the Minister of National Revenue. The Court held that the Minister was wrong to include $483.4 million earned by Cameco’s Swiss subsidiary in the mining giant’s income for its 2003, 2005, and 2006 taxation years and ordered the amounts be reversed out. Also, approximately $98 million and $183.9 million were added back in computing Cameco’s resource profits for its 2005 and 2006 taxation years, respectively.
Had the Court upheld the reassessments, Cameco would have been liable for $11 million in taxes, plus interest and penalties, for those years. Further, subsequent taxation years with the same issues would have resulted in Cameco being liable for a staggering $2 billion in taxes, plus interest and penalties.
In essence, the Court did not agree with the Minister that Cameco had improperly shifted its profits to Switzerland in order to reduce its Canadian tax liabilities. The Court rejected the three positions advanced by the Minister at trial, namely that:
- Cameco had engaged in sham transactions;
- paragraphs 247(2)(b) and (d) of the Income Tax Act applied; and
- paragraphs 247(2)(a) and (c) of the Income Tax Act applied.
Cameco Corporation is the world’s largest uranium producer and has its headquarters in Saskatoon, Canada (“Cameco Canada”). It directly and indirectly owns Cameco Inc. in the U.S. (“Cameco US”) and has a subsidiary in low-tax Switzerland (“Swiss Cameco”). Between 1999 to 2004, Cameco Canada and Swiss Cameco entered into thirteen long-term contracts with each other under which the former agreed to sell uranium to the latter. The terms for pricing the uranium varied between contracts, including: fixed price terms; base escalated pricing mechanisms; market based pricing mechanisms; and a combination of base escalated and market based pricing mechanisms. The contracts with market based pricing mechanisms included ceiling prices ranging from $11.00 to $12.50 a pound. The base price for contracts with fixed price terms and base escalated pricing mechanisms ranged from $8.25 to $33.00 a pound, depending on the contract and applicable year. All of the contracts included flex options that ranged from plus or minus 20% to 30% of the quantity deliverable under the contract. Subsequently, Swiss Cameco bought uranium from Cameco Canada at the contract prices and sold it to Cameco US close to its market price, which usually surpassed the contract prices, sometimes very significantly. Swiss Cameco kept all the revenue from its uranium sales. Cameco US then sold the uranium to end customers at market prices. Under a services agreement, Cameco Canada provided administrative services to Swiss Cameco, for which it was compensated. Cameco Canada also provided guarantees to arm’s length parties with respect to financial agreements they entered into with Swiss Cameco. Swiss Cameco paid Cameco Canada guarantee fees for these services.
The Minister’s first position at trial was that Cameco Canada’s arrangements with Swiss Cameco were a sham: they gave the appearance that Swiss Cameco was doing the work, but Cameco Canada was actually the one carrying on the uranium business. The Minister said that this was done so that Cameco Canada could record its profits in Switzerland instead of Canada, thereby minimizing its Canadian taxes.
The Minister’s second position rested on the transfer pricing provisions found in paragraphs 247(2)(b) and (d) of the Income Tax Act. The Minister argued that the transactions between Cameco Canada and Swiss Cameco differed from transactions that would have been made between persons dealing at arm’s length and were not entered into primarily for bona fide purposes other than to avoid Canadian taxes on income from uranium sales. Therefore, those transactions should be disregarded and all of Swiss Cameco’s revenue should be attributed to Cameco Canada.
The Minister’s third position rested on the more traditional transfer pricing provisions found in paragraphs 247(2)(a) and (c) of the Income Tax Act. The Minister argued that if arm’s length parties would have entered into the challenged transactions, then the terms or conditions made between Cameco Canada and Swiss Cameco were not what arm’s length parties would have made. Essentially, Cameco Canada did not charge Swiss Cameco enough for the uranium it sold to it.
The Court rejected all three of the Minister’s positions. In his 286 page decision, Justice Owen meticulously went through the facts and law in minute detail and found that the transactions were not a sham and that the Income Tax Act’s transfer pricing provisions did not apply.
This case should attract considerable international attention as it involves key transfer pricing principles that many countries have incorporated into their domestic taxing statutes. It will reverberate as a shock to governments and as a relief to multinational enterprises.
