Cameco, the Canadian uranium mining and trading giant, has successfully defended its transfer pricing position involving the establishment of an offshore trading centre in Switzerland and not have its intercompany transactions completely disregarded. The Court disagreed that profits had been wrongly ‘shifted’ from Canada to Switzerland.
This decision has relevance in New Zealand where Inland Revenue can completely disregard (or void) a transaction under the New Zealand transfer pricing rules.
The OECD Transfer Pricing Guidelines permit a tax authority to completely void a transaction that would not have occurred between independent parties acting in a “commercially rational manner in comparable circumstances”. The Canadian Federal Court of Appeal considered that the restructure to establish a Swiss trading company and its subsequent related party transactions did not breach those Guidelines and would have been entered by arm’s length parties. They should not be voided or otherwise recharacterised.
In New Zealand, a similar power to disregard a transaction has been enshrined in statute. The Cameco decision, while not binding in New Zealand, is welcomed. It suggests that a very high threshold may have to be satisfied for Inland Revenue to completely disregard a transaction for transfer pricing purposes.
At the heart of the matter was a Swiss trading subsidiary established by Cameco to buy uranium from Russia (previously used in nuclear weapons). The Group operated uranium mines and conversion facilities in Canada. The Swiss entity was established as the trader for the group, purchasing and selling uranium from Russia and its Canadian and US affiliates. Its US entity was the marketing arm responsible for selling the uranium to third parties for use in nuclear reactors.
The Swiss company had 2 employees who negotiated and concluded the contracts. They were supported from the Canadian head office and a Barbadian affiliate. The arrangements with the Swiss company were set up in 1999. By 2003, the uranium prices surged and the Swiss company made significant profits in 2003, 2005 and 2006. The Canadian Revenue Agency (CRA) considered firstly, that the arrangements were a ‘sham’ and the Swiss company profits should rightly be booked by Cameco Canada. Secondly, CRA argued they were entitled to ‘recharacterise’ the arrangement under transfer pricing rules such that Cameco Canada bought and sold the uranium and the Swiss entity was effectively disregarded in the transaction.
The CRA lost its case in the Tax Court of Canada, resulting in this appeal to the Canadian Federal Court of Appeal (FCOA). The only matter on appeal was whether CRA was able to recharacterise the transaction under Canada’s transfer pricing rules. CRA argued that Cameco would not have entered the transactions with the Swiss entity with an arm’s length person. They argued it had an option to sell uranium directly to all customers, as it did with Canadian customers. Accordingly, CRA argued that it had the ability to recharacterise (or completely void) the transaction.
The FCOA held that the relevant test is whether independent parties would enter those transactions. It rejected CRA arguments, that recharacterisation can apply if Cameco would not transact similarly with an independent party.
Canadian transfer pricing law is similar, but somewhat different, to that in New Zealand. Notably, however, the FCOA had regard to the OECD Guidelines in coming to its decision. New Zealand has specifically enshrined aspects of the OECD Guidelines into its legislation.
The 1995 version of the Guidelines (relevant to this case) stated a tax authority could be justified in recharacterising a transaction in two situations-
- Where the economic substance of a transaction differs from its form; and
- Arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a ‘commercially rational manner’ and impedes a tax authority from determining a transfer price.
The first was not considered relevant and the FOCA did not consider the second applied in the circumstances- arm’s length parties would enter the transactions and they could be adequately priced.
The New Zealand rules also require that the substance of a transaction takes precedence over its contractual form, where inconsistent. Moreover, the New Zealand transfer pricing legislation specifically refers to paragraph 1.122 of the 2017 version of the OECD Guidelines. This requires Inland Revenue to completely void or otherwise recharacterise a transaction which differs from “those which would have been adopted by independent enterprises behaving in a commercially rational manner in comparable circumstances, thereby preventing determination of a price that would be acceptable to both parties…”. That does not mean that the transaction has to be seen in the ‘real market’.
Given this force of statute it remains concerning that paragraph 1.122 may be used to strike down cross-border related transactions as an easier path than the more general anti-avoidance provision. The FCOA in Cameco determined that the migration of the sales function from Canada to Switzerland was real, the transactions were adequately priced and there was no issue that the substance of the transaction differed from its form. Arm’s length parties would enter such transactions. Notwithstanding that considerable profits accrued in the lower taxed Switzerland than in Canada, the CRA was not entitled to overturn the transactions.