Cameco’s $800-million tax battle – by David Milstead (Globe and Mail – May 2, 2013)

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Did you know one of the largest sellers of uranium in Switzerland is Saskatoon-based Cameco Corp.? The Canada Revenue Agency has been aware for some time. And now Cameco shareholders are getting more details about the potential problems it may cause the company – as in more than $800-million in back taxes.

It wasn’t supposed to work out this way, of course. In 1999, Cameco set up a subsidiary, Cameco Europe Ltd., in low-tax Zug, Switzerland. Cameco then signed a 17-year deal to take the uranium it produces in Canada, sell it to Cameco Europe, and have Cameco Europe make the final sale to the end customers all across the world.

Why inject a middleman into the transaction? Well, Cameco is selling the uranium to Cameco Europe at the low prices reflective of 1999, when the deal was signed. Cameco is recording little to any profit in Canada; instead, all the profits appear in Zug, where the tax rate is lower.

This has been a boon to Cameco’s bottom line. The uranium producer estimates it has avoided declaring $4.9-billion in Canadian income, saving it $1.4-billion in taxes, over the last 10 years.

We know this because Cameco has been fighting the Canada Revenue Agency since 2008 over this matter. The CRA has been slowly reassessing Cameco’s tax returns; it’s finished with 2007 now, and has five more – 2008 to 2012 – to go.

Until Wednesday, when Cameco released its first-quarter earnings, the fight seemed a relatively minor matter, because the company had enough accumulated losses to shield it from exposure to back taxes for the disputed returns of 2003 to 2007.

Each time the CRA reassesses a return, however, the taxpayer owes 50 per cent of the disputed bill. The taxpayer only gets it back if the CRA loses the case. Cameco has now run out of accumulated losses to cover these disputed taxes, as evidenced by a cash payment late last year to cover the 2007 return.

With Wednesday’s earnings, Cameco has provided new disclosure, in which it estimates it may need to cough up $400-million to $425-million in the short term as it waits to find out if it will prevail. (The full tax bill, if Cameco loses the fight, would be $800-million to $850-million, or more than $2 per share.)

The company says it is “confident that we will be successful in our case.” But the analysts of Veritas Research Corp., who accurately predicted the numbers in Wednesday’s disclosure, disagree.

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