Cameco: The profits are made in Switzerland, where taxes are low

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Saskatoon-based Cameco is one of the world’s largest uranium producers. Its motherlode consists of extraordinarily high-grade uranium deposits in Saskatchewan: the McArthur River and Cigar Lake deposits account for roughly 80% of its proven and probable reserves. But whatever its debt to Canadian geology, the company pays little tax here. That’s partly because under an arrangement struck years ago, it sells that uranium at low prices to a subsidiary in Switzerland, where profits are taxed at lower rates.

In 1999 Cameco incorporated a subsidiary called Cameco Europe it has described as a “trading and marketing company.” (It was originally located in Luxembourg, but was replaced a few years later with a similarly named subsidiary located in Zug, Switzerland.) This subsidiary employed just one person (a German resident) in 2003, and rented space in a law office, according to the Canada Revenue Agency. But don’t be fooled by its diminutive size: Cameco Europe occupied a crucial role in Cameco’s corporate structure. By virtue of a contract struck in 1999, Cameco agreed to provide its subsidiary with uranium for many years to come. The subsidiary was then free to sell that uranium to customers on whatever terms it could negotiate—including back to Cameco itself. (Canadian Business has not seen the contract, which has not been publicly disclosed; our understanding comes from corporate disclosures and court documents. Citing advice from its lawyers, Cameco declined to answer questions about the arrangement, which is the subject of court proceedings.)

Although we don’t know at what prices Cameco agreed to sell its uranium to its subsidiary, Cameco has revealed that “these arrangements reflect the uranium markets at the time they were signed.” Uranium markets were depressed in 1999; the metallic element traded on the spot market at around US$10 a pound. In fact, Cameco executives were confident prices would recover—and said so in regulatory filings. They were right. Low prices discouraged producers from bringing new projects onstream and inventories declined. These forces began pushing up spot prices—they increased more than 40% in 2003 alone. They peaked at US$140 a pound, and in 2012 they still averaged US$47 a pound.

Thanks in part to the low-cost uranium coming from Canada, rising prices made the Swiss subsidiary tremendously profitable—it earned $4.3 billion during the six-year period ending in 2012. Conversely, the Canadian operations were locked into selling its uranium at prices set during the 1999 trough, and costs for extracting uranium from the ground rose as miners’ wages, trucks and other mining equipment became increasingly expensive. Combined, these two forces resulted in serious losses in Canada—Cameco’s Canadian operations racked up a cumulative $1.3-billion loss during the same six-year period.

Where Cameco racks up its profits and losses matters. Its combined federal and provincial tax rate was just under 27% in 2012, and was higher in previous years. We don’t know Cameco’s tax rate in Switzerland, but it’s undoubtably lower than that. In Switzerland corporate taxes vary from canton to canton; Zug prides itself on having one of the lowest tax rates. “Basically, a company pays 15.4% of its net profits in total taxes,” claims a brochure that encourages businesses to incorporate there. “However, certain companies qualify for tax privileges.” Zug’s low tax rates likely help explain why, by our calculations, Cameco’s cash taxes over the past decade amounted to just 17% of its pre-tax income. That’s low for a mature mining company.

An additional benefit of Cameco’s offshore arrangement is that as the company racks up losses in Canada, it also accumulates tax loss carry-forwards. These can be applied against future profits to reduce taxes owing in Canada. Cameco actually recovered $42 million in income taxes in 2012. So the company’s offshore arrangement worked out very well indeed for Cameco—and very badly for the governments of Canada and Saskatchewan.

The Canada Revenue Agency’s tax-planning division began investigating Cameco as early as 2006. It arrived at the opinion that the arrangement with the office in Europe existed not for any bona fide business purpose, but rather was “a sham” intended to reduce its tax bill. In 2008 it reassessed Cameco’s taxes owing for each year between 2003 and 2007—a period during which CRA thinks the company’s real taxable profits were $1.3 billion higher than reported.

Cameco appealed those reassessments to the Tax Court of Canada. By definition, multinational companies have subsidiaries in different countries that must transact with each other. Negotiating terms of those transactions involves what’s known as “transfer pricing.” In theory, so long as those arrangements square up with what independent parties would agree to, it’s all perfectly legal.

Cameco argues its offshore arrangement complies with all requirements. During a conference call last year, chief financial officer Grant Isaac justified the European office by claiming the majority of its customers reside outside Canada. “At the time the arrangements were put in place, the prices between Cameco and our subsidiary reflected market conditions,” he continued. “In other words, they are prices that an independent third party would reasonably agree to.” Cameco indicated in court filings that its external auditor, KPMG, conducted a “transfer pricing study” that validated its approach.

Cameco predicts it will win, and that the dispute will therefore have no material financial impact. It might be right: the CRA got thrashed in the Supreme Court in 2012 on one of its biggest transfer pricing cases, a long-running dispute with GlaxoSmithKline. Observers are divided on how dangerous the situation is to Cameco and its shareholders. “We view potential remittances to the CRA as manageable,” wrote Raymond James analyst David Sadowski in May. But Pawel Rajszel, an analyst with Veritas Investment Research, thinks otherwise. From his perspective, independent parties wouldn’t agree to the arrangement’s terms. “At least in our opinion, the reasonable thing to do would not be to enter into a 17-year fixed-price contract with such subsidiaries if you think uranium prices are going up and you have to do all the work,” Rajszel explains. Cameco knows it cannot guarantee a win against the tax agency and has so far made a provision of $63 million for a possible defeat. However, it also acknowledges the bill could be as high as $850 million in cash taxes—not including interest and penalties—if it loses.

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