Long-term supply agreements
Long-term supply agreements are under scrutiny from tax authorities,
as indicated by the CRA’s audit of Cameco. In 1999, Cameco entered
into an intercompany agreement with its Swiss marketing hub for the
purchase of uranium; this locked in the price of future transactions at
1999 market rates for the next 17 years.6 During that time, the price
of uranium increased substantially, leading to significant profits for
the Swiss subsidiary.
With the introduction of BEPS Action 10, which deals with profit
shifting through intercompany transactions that would not typically
occur between third parties, tax authorities are likely to focus more
closely on the long-term supply agreements of mining companies.
Included in the report on Actions 8, 9, and 10 is new guidance specifically related to the handling of commodity transactions.7 Within
this guidance are new recommendations for determining the pricing
date for commodity transactions; these recommendations are designed
to prevent taxpayers from using pricing dates in contracts to purposefully adopt the most advantageous quoted price.8 Many contractual
commodity pricing structures, such as the one used in the Cameco
agreement, could be significantly affected by these changes.
R&D/intangibles
The new guidance on intangibles that was introduced with BEPS Action 8
presents potential opportunities for mining companies to lower their
effective tax rates. Action 8 discusses the return on intangibles in the
context of development, enhancement, maintenance, protection, and
exploitation—commonly referred to as the “DEMPE” functions.
Specifically, the Action explains that an entity’s compensation from
intangibles should correspond to its functions performed, assets contributed, and risks assumed in relation to the DEMPE functions.9
In the mining industry, many aspects of these functions are performed
by the head office. The new guidance in Action 8 may provide greater
support for Canadian-based mining MNEs to compensate their
Canadian head offices for undertaking research and development and
for developing intangibles used by their foreign operating subsidiaries. Given the taxable position of many Canadian mining companies,
this opportunity to reallocate income could be beneficial from a tax
perspective.
Country-by-country reporting
The introduction of BEPS Action 13 will expose MNEs’ key transfer
pricing metrics to tax authorities.10 Action 13 requires large MNEs to
provide information with respect to their global allocation of income,
economic activity, and taxes paid among countries to all relevant governments.11 The new information requirements give tax authorities a
full picture of a mining company’s international value chain and
make apparent any misalignments between income allocation and
value creation—for example, a marketing entity with excessive profits
and few employees, or an overly aggressive financing structure.
Implementation of country-by-country reporting was proposed in
Canada’s 2016-2017 federal budget and is expected to take effect for
taxation years after 2015.
Knowledge is key
Given the magnitude of transfer pricing issues currently faced by
mining companies and the heightened level of scrutiny on transfer
pricing due to the BEPS Project, companies need to become increasingly
proactive in assessing transfer pricing risk. CFOs, tax executives,
treasury groups, and other relevant management should ensure that
they are familiar with the guidance in the BEPS reports, and understand
how this guidance is relevant to their company and its related-party
transactions.
Geoff Leo, “Ottawa accuses Cameco of multi-million dollar tax
6
dodge,” CBC News, September 19, 2013. (cbc.ca)
OECD (2015), Aligning Transfer Pricing Outcomes with Value
7
Creation, Actions 8