TRANSFER PRICING AT

CAMECO CORPORATION
Arkawira Nul Salam
THE URANIUM INDUSTRY

• Uranium is used as a fuel in nuclear power plants

• Greener energy solutions ➔ increased nuclear
energy demand ➔ expected to further increase of
uranium demand
• One that differentiates the uranium market from
other commodities is the predictability of
demand
• According to the World Nuclear Association 2011
Market Report, the demand for uranium is expected
to increase 48% over the period 2013 to 2023
 URANIUM GLOBAL PRODUCTION

Production by Country Production by Company

ABOUT CAMECO

• One of the leading uranium producers

• Commanding 14% of the world’s uranium production
• Major player in providing the processing services for
uranium fuel for power plants
• Owns stakes in nuclear power plant operation
• Operates five mines in Canada, the United States and
Kazakhstan
 CAMECO HISTORY

Cross-listed on the NYSE

Cameco was created and traded under the ticker
symbol CCJ
1991 1999

1988 1996

Listed on the Toronto Entered into an agreement

and the Montreal stock to purchase the natural
exchanges, tucker uranium that was obtained
symbol CCO from the dismantling of the
Russian nuclear arms

Cameco Gold was formed as

a subsidiary that operated the
firm’s gold production
CAMECO EUROPE LTD.

• Wholly owned subsidiary of Cameco created in 1999

• Registered in Zug, Switzerland, which boasts very low
corporate tax rates
• The Swiss tax rate is around 10 per cent as compared to Canada’s
27 per cent average rate
• Due to its proximity to European customers, CEL primarily
functioned as the marketing unit of Cameco in Europe
• Due to its proximity to European customers, CEL primarily
functioned as the marketing unit of Cameco in Europe
• Cameco charges CEL for the cost of the European sales
• CEL then bills its customers, although the product is shipped to the
customers directly from Canada
 URANIUM SPOT AND LONG TERM PRICES

• Cameco had entered into a seventeen-year fixed price

contract with CEL in 1999
• As per convention, the price of the contract was fixed based
on the spot price existing in 1999, which was at US$10 per
pound (453.59 grams)
• The spot price had increased since, at one point reaching
US$140 per pound
• This rise resulted in increased profits for CEL, which
operates in the low tax environment of Zug, and a lower tax
burden for Cameco

Note: Euratom long-term price is the average price of uranium delivered into the EU
that year under long term contracts. It is not the price at which long-term contracts are
being written in that year.
TRAN S F E R P R I CING AN D TAX D I F F E R E NTIAL I N C AN ADA
AN D S W I T Z ERLAN D

• Transfer pricing involves setting prices for transfer

of goods and services among different divisions or
subsidiaries of a firm
• Multinational corporations have subsidiaries in
different countries, which are subject to different
tax regimes
• There’s an opportunity to set transfer prices in
such a way that lowers the overall tax burden of
the firm
TRANSFER PRICING EXAMPLE
 A L L E G AT I O N S O F TA X E VA S I O N B Y T H E
C A N A D I A N R E V E N U E AG E N C Y

• During the annual audit in 2008, CRA identified issues with the transfer pricing approach employed by Cameco
to set the price of uranium sold to its Swiss subsidiary
• CRA reassessed Cameco’s earnings and the amount of tax payable for the years 2003 through 2007
• 2003 : $43 million
• 2004 : $108 million
• 2005 : $197 million
• 2006 : $243 million
• 2007 : $708 million
• The company had to make cash payment of $27 million to cover for its increased tax liability for 2007
• Cameco is contesting CRA’s decision; however, Cameco’s management has made a provision of $63 million for
the period of 2003 through 2012
• Market analysts estimate that if CRA wins the case, the additional tax liability for the years 2008 through 2012
could be around $800 million
Cameco’s Consolidated Statements of Earnings
(for the years ended December 31)
 CONCLUSION

• It was not clear to her whether CRA’s allegations were correct.

• If they were, it would be difficult to understand how the questionable practice could have gone on for so long,
in spite of all the regulations and reporting requirements.
• Who would be responsible in that case?
• Is it Cameco’s management, just the board, or should the responsibility be extended to the regulatory
authorities as well?
• Where did the problem lie?
• How could it be prevented in the future?
 CRA’S ALLEGATIONS WERE CORRECT
OR NOT??

Having concluded that the arrangements between Cameco and CEL were neither
a sham nor subject to recharacterization, the court evaluated whether the pricing
of such arrangement was arm’s length.
The "arm's-length principle" of transfer pricing states that the amount charged by
one related party to another for a given product must be the same as if the
parties were not related. An arm's-length price for a transaction is therefore what
the price of that transaction would be on the open market.
 WHO WOULD BE RESPONSIBLE IN THAT
C ASE?

CEL is revenue centre, CEL bilss its costumer by cost of european sales altough
the product is shipped to the customer directly from Canada.
Abuse of transfer pricing has the potential causing the risk of reduced state
revenue from the tax revenue side.
 WHERE DID THE PROBLEM LIE?

• Transfer pricing analyses should, to the extent possible, be based on objective

evidence. Speculation about what parties might have known should be avoided.
• Documentation on transfer pricing is a must.
- Master file: provides high-level information on global, business operations and
transfer pricing policies
- Local file: company-specific information on related-party transactions and the
arm’s length basis of such transaction
- Contry-by-Country report: allocation of income, taxes and business activities
for each tax jurisdiction.
 HOW COULD IT BE PREVENTED IN THE
FUTURE?

• Transaction should covered by appropriate legal documentation and whether the relevant
parties to such transactions are acting in accordance with the legal arrangements.
• A convention or international tax treaty is needed as a source of international law in the
exchange of information between countries, in the context of combating tax avoidance, tax
evasion, and tax neglect.
• The Organization for Economic Co-operation and Development (OECD) was founded in year
1961. At present there are 30 members with the aim of: (1) achieving a high level of economic
growth, employment and improving sustainable living standards, (2) expansion of a healthy
economy, and (3) the contribution of expanding world trade on a multilateral basis based on
non-discrimination from all members.
• Some provisions general guidelines (OECD, 1997) include: (1) applying arms-length principle
with preference to the traditional transaction-based method, (2) the application of the level of
comparability that emphasizes the functions, risks carried and assets that utilized, (3) the
introduction of a profit based method called the transactional net margin method (TNMM), and
(4) understand the importance of documentation on transfer pricing and the role of the penalty
in increasing compliance.