Cameco Corp.'s long-awaited showdown with the Canada Revenue Agency will throw a spotlight on the tricky question of how to tax companies that channel billions of dollars in sales through foreign subsidiaries.
The Tax Court of Canada case, which is expected to begin Wednesday in Toronto, has inched along at an agonizingly slow pace since Cameco filed an initial appeal in 2009. It centres on how the Saskatoon-based miner accounts for sales of the uranium it produces in Canada.
More broadly, it focuses on the ability of companies to manage their affairs by setting up foreign units in low-tax jurisdictions and transferring assets to them.
While there is nothing necessarily wrong with such an arrangement, the general rule is that companies cannot set up subsidiaries purely as a tax dodge. Foreign units must fulfill a genuine business function.
In addition, transfers of assets between subsidiaries have to be priced at realistic levels that would be suitable for "arm's-length" transactions between unrelated parties.
A decision against Cameco could result in a multibillion-dollar tax bill for the uranium miner and a much tougher regulatory regime for other companies that also funnel sales through foreign units.
Back in 1999, Cameco established a subsidiary, Cameco Europe Ltd., in Switzerland and agreed to provide it with uranium for the next 17 years at roughly $10 (U.S.) a pound, which was close to the prevailing price at the time.
As uranium prices soared in subsequent years, this agreement allowed Cameco to record little or no profit in Canada on the uranium sales. Instead, most of the profit was attributed to the Swiss subsidiary when it sold the metal on to customers. Since the tax rate in Switzerland is lower than in Canada, this resulted in major tax savings.
The CRA takes issue with this arrangement and argues that the profit should properly be recorded in Canada. The tax agency says Cameco had $3.4-billion (Canadian) more in Canadian profit between 2003 and 2010 than the company declared.
If the CRA's approach is also applied to the period between 2011 and 2015, Cameco could be hit with a total tax bill of about $2.2-billion, plus interest and penalties, for the 13-year period.
Cameco said in its 2015 annual report that external advisers have counselled it that "CRA's position is incorrect." However, the miner doesn't expect a quick victory in the tax brawl. The trial that begins Wednesday will likely last until March, 2017, with a ruling six to 18 months later, the company says.
"We expect this case to be ultimately settled out of court, [but] the timing … is unknown and likely not soon," Rob Chang, an analyst with Cantor Fitzgerald, wrote in a report this week.
The Cameco case carries implications for companies like Silver Wheaton Corp. of Vancouver, which is locked in its own battle with the CRA.
Silver Wheaton is a so-called streamer. It provides upfront cash to miners in exchange for the continuing right to purchase a portion, or stream, of their future output at discounted prices.
The bulk of Silver Wheaton's streams comes from mines outside of Canada, many of them in Latin America. The silver and gold produced by those mines is sold through a Silver Wheaton subsidiary in the lightly taxed Cayman Islands.
As with Cameco, the CRA objects to this arrangement and argues that the profit should properly be taxed in Canada. It has presented Silver Wheaton with a reassessment notice that demands $353-million for the years 2005 to 2010.
For its part, Silver Wheaton says the tax agency is overstepping its mandate by trying to tax transactions involving metal that was produced outside of Canada and sold outside of Canada, without ever touching Canadian soil. The company is appealing the CRA assessment in the Tax Court of Canada and says it is confident of victory.
In a recent interview, Randy Smallwood, chief executive officer of Silver Wheaton, said he hoped the two sides will be able to arrive at a settlement when the discovery process in the trial begins in the fourth quarter. Barring that, he expects a trial date in mid-2017 and a decision in early 2018.
A decision against Silver Wheaton would raise questions about where the streaming company should be domiciled, he said. "We could be the first of many resource companies to leave Canada, because a negative decision would imply that resources mined outside of Canada would be subject to taxation in Canada."