The world's largest publicly traded uranium company will clash in court this week with the Canadian Revenue Agency over a potential $2.2-billion tax bill.
At question is whether Saskatoon-based Cameco Corp. set up a subsidiary in low-tax Switzerland and sold it uranium at a low price simply to avoid tax, as the CRA contends. Cameco maintains it was a legal and sound business practice.
For the uranium producer the case presents a serious risk of impact to its bottom line, as the CRA looks to shift an estimated $7.4 billion in foreign earnings between 2003 and 2015 back to Canada.
Meanwhile, the government risks missing out on a significant direct tax windfall. It also risks losing out on setting an example for the growing number of companies trying to avoid taxes by shifting profits overseas.
"There's so much at stake," says David Hogan, a cross-border tax specialist at financial consultancy Richter. "They need to have an example of somebody who did something wrong, and that is actually a deterrent for many more tax payers to not even bother trying."
He said many cases are resolved before court, in part because of the cost and length of time such cases takes, but says this case is different.
"Given the situation, and the amount, I can understand why litigation is pursued here," said Hogan.
The current case, dealing specifically with tax years 2003, 2005 and 2006 has been plodding through appeals and legal motions since 2009 when Cameco first challenged the CRA's findings.
The company doesn't expect the actual trial, which starts Wednesday, to wrap up until March 2017, with a ruling six to 18 months after that.
Analyst Rob Chang with Cantor Fitzgerald says he expects the case to hover over the company for a while. "While we expect this case to be ultimately settled out of court, the timing of that even is unknown and likely not soon," he said in a note to clients Monday.
Dennis Howlett, executive director of Canadians for Tax Fairness, says the case is important because the government has a more clear-cut case compared with other tax disputes.
He said the issue of transferring profits internationally is a wide grey area. It's often unclear what the subsidiaries should pay when, for example, companies like Google transfer profits by charging for intellectual property, or Starbucks transfers profits by charging for its trademark.
"The CRA has a much stronger case to make because they can say, 'Look, there is a world market price for uranium and your price that you cooked up between your own subsidiary was an artificially low price,"' said Howlett.
Cameco set up the subsidiary in 1999 and established a 17-year deal selling uranium at approximately US$10 a pound, which is what it was roughly trading at around the time.
The price, however, shot up to over US$130 a pound by 2007 and still trades at over US$30 a pound today, while the Swiss subsidiary still pays the fixed price.
"No unrelated company would have made that kind of a deal. It was a convenient thing and it was primarily done to avoid taxes," Howlett said.
Hogan says that the case won't be quite so simple though, and that it's still complicated deciding how to price commodities as they go from the mine to the final buyer.
He said there is some value attached to the contract with the Swiss subsidiary, and the case can quickly get bogged down in what exact price would be deemed reasonable.
"The real question is: what was the value of the services and the contract in Swissco?" said Hogan.
Cameco spokesman Gord Struthers said in an email that the company maintains that the business structure made sense, and it has done nothing wrong.
"We followed all of the rules and paid all taxes owed under Canadian law. There is a sound business rationale for Cameco's corporate structure and related transfer pricing arrangements and we remain confident that our position will be upheld by the court," said Struthers.
The CRA declined to comment on the specifics of the case, but said it is committed to protecting Canada's revenue base and takes issues of non-compliance seriously.
"International tax non-compliance and aggressive tax avoidance are complex global issues. The CRA is committed to combating the abusive use of offshore jurisdictions and protecting the integrity of the Canadian tax system."
Chang says the rest of the Canadian business community is keeping a close eye on Cameco's court battle. " This case is significant for the Canadian business landscape as several companies in engage in similar practices to shift profits to lower tax jurisdictions," he said.