Cameco scores victory over CRA

The Tax Court of Canada has ruled in favour of Cameco (TSX: CCO; NYSE: CCJ) in the company’s decade-long dispute with the Canada Revenue Agency over tax reassessments for the 2003, 2005 and 2006 tax years.

The Tax Court said Cameco was in full compliance with Canadian laws regarding the marketing and trading structure involving foreign subsidiaries and the related transfer pricing methodology used for certain inter-company uranium sale and purchase agreements.

The court has referred the case back to the Minister of National Revenue, which will issue new reassessments for the tax years in question. CRA has 30 days to appeal the ruling.

Cameco said it will also submit an application to the court to recoup costs incurred during the course of the dispute.

The total tax reassessed for 2003, 2005 and 2006 was $11 million, 50% of which Cameco has already paid, and now expects to be refunded.

To date Cameco has paid or otherwise secured $781 million in taxes, plus related interest penalties on reassessments for the tax years from 2003 to 2012 ($303 million in cash and $478 million in letters of credit), or about half of the total claimed by CRA for those years. The tax years from 2013 through 2017 have not been reassessed yet.

“As we hoped and expected, it was a clear and decisive ruling in our favour,” Tim Gitzel, Cameco’s president and CEO, declared in a morning conference call. “Our company has been through a lot over the past several years, so this is a great day for Cameco, for our investors, for our employees, and our other stakeholders.”

While the decision only applies to the tax years 2003, 2005 and 2006, where the cash taxes owing were modest and is subject to appeal, Gitzel said, “the thorough and meticulous analysis of the facts in the judgment will make it difficult to overturn, and furthermore will be relevant in determining the outcome for subsequent years.”

Cameco has been reporting on its transfer pricing dispute since 2008.

The CRA, Gitzel explained, had been shifting all of the income earned by Cameco’s subsidiary, Cameco Europe Ltd., back to Canada and applying Canadian steps towards tax rates, interest and penalties. Although the court case only covered the years 2003, 2005 and 2006, Cameco disclosed the amount owing if the CRA were to assess the company from 2003 to the end of 2017.

“In that scenario, the total potential cash taxes and transfer pricing penalties owing were estimated to be between $1.95 billion to $2.15 billion,” Gitzel said. “In addition, interest and installment penalties would be charged, which would be material.

“Let me be clear,” he said. “We followed all the rules at the time we set this structure up, and we set it up in a jurisdiction that had a regulatory system that understood nuclear energy and how nuclear materials are transacted. We put inter-company purchase and sale agreements in place that were comparable to the arm’s-length contracts we were signing with third parties at the time.”

Gitzel said that at the time Cameco set up the structure, the federal government “recognized the disadvantage its tax system imposed on Canadian companies relative to its global competitors,” and “to preserve head office jobs and investment in Canada, it encouraged companies like Cameco to set up these types of structures.

“The Tax Court of Canada’s ruling confirms that our marketing and trading structure was set up appropriately,” he continued. “It also confirms that the transactions between Cameco and its European subsidiary were commercially normal and the pricing under its purchase and sale agreements was appropriate.”

As a result, he explained, the CRA does not have the right to shift all of Cameco Europe’s income back to Canada and tax it in Canada, and all of the taxes the company owed were paid in accordance with tax rules.

Gitzel cautioned that the CRA can appeal the ruling, and the appeal could take two years. But he also noted that the three tax years in question (2003, 2005 and 2006) will have to be re-assessed in accordance with the ruling. And if the decision is appealed, the CRA may continue to reassess Cameco for the tax years 2013 and beyond.

“While the [court] decision does not automatically apply to subsequent years, we believe the thorough and meticulous analysis of the facts in the judgment will be relevant in determining the outcome for subsequent years,” Gitzel said.

“However, with the finding that the structure was appropriate and the contracts commercially normal, we believe there is no basis to shift all the income earned by Cameco Europe back to Canada and apply Canadian statutory rates, interest and penalties.”

Gitzel ended the call with comments about how the dispute had negatively impacted the company, its employees and its stakeholders.

“As a result of this dispute, we have had to fight through a seven-year trough in our industry with what feels like having our hands tied behind our backs,” he said. “We have made very difficult decisions in order to manage the risks we face, which in large part are due to the uncertainty created by this dispute.”

Those decisions resulted in the loss of jobs for nearly 1,500 employees, shutting down operations in northern Saskatchewan and reducing the workforce at its corporate office to preserve its financial capacity during a downturn in the market. He also noted that the decisions the company has made as a result of the dispute have affected some of Canada’s most vulnerable communities.