Transfer Pricing Times: Cameco Tax Court Decision

In this issue: The Tax Court of Canada rules in favor of Cameco Corporation in a transfer pricing dispute with the Canada Revenue Agency; the OECD released its report on MAP Statistics for 2017, using the framework agreed upon through Action 14 of the BEPS initiative; the Cambodian Ministry of Economy and Finance introduced the arm’s-length principle into the Cambodia transfer pricing rules; the National Legislative Assembly of Thailand introduced specific transfer pricing provisions and documentation requirements to the Thai Revenue Code; and Duff & Phelps will host the 2018 IP Value Summit at The Lodge at Torrey Pines in La Jolla, California on November 28-29, 2018.


Cameco Tax Court Decision

On September 26, 2018, the Tax Court of Canada (the “Tax Court”) released its decision in Cameco Corporation (“Cameco”) v. Her Majesty the Queen (the “Crown”), 2018 TCC 195, ruling in favor of Cameco. On October 26, 2018, Cameco announced that the Crown had filed an appeal with the Federal Court of Appeal.

The dispute relates to the pricing of uranium sales between Cameco, its foreign subsidiaries and third parties during the 2003, 2005 and 2006 taxation years (the “audit period”). Cameco’s foreign subsidiaries were established to sell and trade uranium, and often did so under long-term supply contracts.

The Crown argued that:

  • The transactions undertaken by the trading subsidiary were a sham; 
  • Alternatively, that the transfer pricing recharacterization rules allow adjustments based on transactions different than the taxpayer’s actual transaction, with the same effect; or
  • Alternatively, that transfer pricing adjustments should be made to the existing transactions, to the same effect.

The total adjustment to Cameco’s income made by the Canada Revenue Agency (“CRA”) exceeded CAD 483 million, across the three tax years.

The Crown’s expert witnesses applied a variety of transfer pricing methods, most of which analyzed the returns (gross margin or operating profit) earned by the foreign subsidiaries, by comparison to arm’s length trading companies or routine distributors. One expert also applied the cost plus method to one of the transaction streams, by comparing the markups earned by Cameco on sales of mined uranium to its foreign subsidiary to the markups earned under long-term supply contracts with other customers.

Cameco argued that the transactions were not a sham, the transfer pricing recharacterization rule does not apply, and that the existing transactions already used arm’s length prices. Cameco’s expert witness relied primarily on the comparable uncontrolled price method (“CUP”) to establish uranium prices, with various adjustments to account for market price differences between products and over time. Cameco also called expert witnesses to testify as to the behavior of multinational enterprises, and the types of sales contracts used between arm’s length parties in the uranium industry.

The Tax Court sided with Cameco on each point. It found that:

  • The taxpayer had not represented its arrangements or transactions in any manner different from what they knew those arrangements and transactions to be, so there was no element of deceit as would be required for a sham.
  • The transfer pricing recharacterization rules also did not apply, as Cameco’s arrangements were “commercially rational” and the parties entered into the various transactions for the bona fide business purpose of earning a profit.
  • The CUP method as used by Cameco’s expert witness was the most reliable way to assess the terms and conditions that arm’s length parties would have reached. By contrast. the Tax Court criticized the Crown’s expert witnesses for relying on hindsight and subjective views, instead of objective benchmarks for market prices at the time of the transaction.
  • No adjustments to Cameco’s transfer prices are required, because Cameco’s sales of uranium took place at arm’s length prices. The profit earned by the foreign subsidiaries was because of price risk assumed by those legal entities under various contacts with Cameco and third parties.

The CRA has appealed the transfer pricing decisions, but not the decision that the sham doctrine does not apply. Cameco expects the resulting Federal Court of Appeal case on the transfer pricing matters will take about two years.

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OECD Releases MAP Statistics for 2017 Under New BEPS Framework

Many taxpayers have initiated Mutual Agreement Procedures (“MAP”) in order to resolve double tax matters that arise when tax authorities come to inconsistent positions on the allocation of income between related entities in different tax jurisdictions. Through MAPs, the relevant taxing authorities (operating under the provisions of tax treaties between the countries involved) are supposed to arrive at a joint agreement regarding the allocation of profits between tax jurisdictions. On October 10, 2018, the OECD released its report on the MAP Statistics for 2017, using the framework agreed upon through Action 14 of the Base Erosion and Profit Shifting (“BEPS”) initiative. Under Action 14, OECD member countries submit reports on their local MAP activity each year, which allows the OECD to publish statistics regarding the number and average length of MAP cases undertaken in any given year. The publication of these statistics is intended to improve transparency regarding MAP activities and place a particular focus on tracking the successes of international tax dispute resolution, as well as identifying areas for procedural improvement.

The new MAP Statistics Reporting Framework makes a distinction between the cases received before Action 14 (i.e., before January 1, 2016 or January 1 of the year of joining the BEPS inclusive framework) and after Action 14 implementation (i.e., cases received on or after January 1, 2016 or January 1 of the year of joining the BEPS inclusive framework).

The key takeaways from the 2017 MAP Statistics include the following:

  • Mixed results concerning the improved resolution of MAP cases. Of the 87 countries that reported MAP statistics in 2017, 62 countries had the same or fewer number of outstanding MAP cases. However, on a consolidated basis, the total number of outstanding MAP cases increased from 4,675 cases at the beginning of the year to 4,727 cases at the end of the year. These statistics suggest that countries, such as the United States, France, and Spain, are becoming increasingly effective in resolving MAP cases. On the other hand, the growing backlog of outstanding cases in other countries, such as the United Kingdom, Italy, and Argentina suggests that time and resource constraints continue to be an issue. Despite reducing the number of transfer pricing cases in inventory throughout the year, the United States still had the most cases outstanding at the end of 2017 (676 cases), followed by India (646 cases), which may speak to the increased interest in dispute resolution through MAP in these countries.
  • Average Duration to MAP Resolution Remains above Action 14 Target. While the OECD under Action 14 encourages jurisdictions to resolve MAP cases within 24 months of notification, the statistics show an average of 30 months to resolution for transfer pricing related disputes, suggesting no material improvement from 2016. However, the duration to resolution varies greatly by case complexity and jurisdictions involved, spanning as little as 3 months to resolution to as much as 59 months to resolution, and noted improvements have been made in certain jurisdictions. For example, the United States has drastically reduced the average time to resolution of MAP cases since the formalization of Action 14, reporting an average of 35 months to resolution for MAP cases started prior January 1, 2016 compared to an average of 5 months to resolution for MAP cases started after January 1, 2016.

Additional information concerning the Mutual Agreement Procedure Statistics for 2017, as published by the OECD, can be found here.

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Cambodia Implements Arm’s-Length Standard for Intercompany Pricing of Related Party Loans 

On October 10, 2017, the Cambodian Ministry of Economy and Finance issued Prakas No. 986. MEF.P. ("Prakas 986"), which effectively introduced the arm’s-length principle into the Cambodia transfer pricing rules, to address perceived transfer pricing driven tax erosion to the Cambodian tax base through the treatment of related party loans. Notably, the arm’s-length concept in the new guidelines appeared to contradict Cambodia’s existing Instruction No. 151, as previously issued by the General Department of Taxation’s (“GDT”), which permitted the implementation of interest-free loans between related parties if these loan agreements were registered with the GDT within 30 days.

To clarify the above confusion, the GDT issued Instruction No. 11946 on August 21, 2018, which requires that Cambodian enterprises entering into loan transactions with their related parties adhere to the following:

  • The interest rates applied to related party loans are required to be determined using the arm’s-length principle, as stated in Prakas 986; and,
  • As stated in Article 18 of Prakas 986, the taxpayer must record and maintain relevant document(s) to support the determination of the interest rate and provide them to the GDT / local tax authorities upon request. The requirement under Instruction No. 151 to submit the respective loan agreements to the GDT for registration would no longer apply under the new guidance.

Therefore, Cambodian taxpayers engaged in the provision / receipt of interest-free related party loans should consider the following:

  • Existing loan agreements may need to be revised to include an arm’s-length interest rate in compliance with Instruction No. 11946; and,
  • These related party loans should be documented in order to substantiate the arm’s-length nature of the interest rates, in accordance with Prakas 986 requirements.

The GDT’s updated guidance around pricing intercompany loans may appear unconventional from a transfer pricing viewpoint. For instance, it may be favorable for the Cambodian tax authorities to accept existing interest free loan arrangements for Cambodian borrowing entities, as there would be no tax benefit or incentive to impose an additional deductible arm’s-length interest expense. However, increased interest expenses for a Cambodian borrowing entity also generate increased withholding tax, which provides a more immediate revenue stream for the Cambodian tax authorities and is not dependent on overall profitability, tax incentives, or other factors. Thus, the key consideration for taxpayers will be to strike a balance between the transfer pricing considerations brought about by the updated regulations and the withholding tax impact of such an imputed interest expense.

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Thailand Proposes Implementation of Documentation Requirements Through Revenue Code Amendment Act

On September 27, 2018, the National Legislative Assembly of Thailand passed the long-awaited Revenue Code Amendment Act (the “Act”), introducing specific transfer pricing provisions and documentation requirements to the Thai Revenue Code.

Key provisions contained in the Act include:

  • Taxpayers exceeding the prescribed threshold (i.e., report an annual turnover above THB 200 million) that do not fulfill the other exemption conditions are required to submit a transfer pricing disclosure form together with the annual corporate tax return. Compared to the existing disclosure form (PND 50), the new disclosure form requires more detailed information disclosures.
  • Taxpayers required to submit the transfer pricing disclosure forms are additionally required to prepare annual transfer pricing documentation to support the arm’s-length nature of their related party transactions. The transfer pricing documentation will need to be submitted either: (a) within 180 days from an initial request by the Revenue Department; or, (b) within 60 days from a subsequent request from the Revenue Department, which may be extended to 120 days provided there is a reasonable explanation for the taxpayer being unable to meet the 60-day deadline.
  • The annual transfer pricing documentation will need to be maintained for five years from the tax filing date of that financial year. 
  • A penalty not exceeding THB 200,000 will apply to taxpayers who have either failed to submit a required transfer pricing disclosure form or have provided incorrect information within the disclosure form.
  • The Act empowers the Revenue Department to make upward or downward primary adjustments to the taxpayers’ transfer prices if these are assessed as being inconsistent with arm’s-length conditions. This means that the Act permits the imposition of secondary adjustments, which are intended to restore the actual financial situation of the related parties whose transactions were subjected to the primary transfer pricing adjustments (e.g., deemed dividends and interest-bearing loans).
  • Tax refunds resulting from transfer pricing assessments may be claimed by the taxpayer by the later of (a) 60 days from the date of receiving the tax assessment letter, or (b) three years from the final day of the tax return filing period of the transfer pricing assessment.

Notwithstanding the above, the Act currently does not contain specific implementation details, which are expected once the Revenue Department updates the current transfer pricing legislation (i.e. Departmental Instruction No. Paw. 113/2545). These are expected to contain additional clarifications, including guidance on the exemption conditions, requirements of the transfer pricing documentation and disclosure forms, timeframes and procedures of transfer pricing assessments and the basis for the imposition of penalties. Taxpayers are recommended to stay abreast of continuing developments in Thailand’s transfer pricing regulatory environment.

The Act is currently awaiting official legislative implementation through an announcement in the Royal Gazette and would take effect from accounting periods starting on or after January 1, 2019.


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Duff & Phelps Hosts 2018 IP Value Summit in La Jolla, CA

Duff & Phelps will be hosting the 2018 IP Value Summit at The Lodge at Torrey Pines in La Jolla, California on November 28-29, 2018. The IP Value Summit conference, held annually since 2013, aims to provide colleagues and peers with a forum to discuss current events, best practices, and the challenges and opportunities in valuing, managing, monetizing, and protecting intellectual property assets in today’s dynamic environment. The conference is designed for IP and Licensing Professionals, General Counsel, Attorneys, Tax Professionals, CEOs, CFOs, Controllers, M&A Heads, and other industry professionals, and is organized around three different topic tracks: (1) Valuation and M&A, (2) Tax and Transfer Pricing and (3) Licensing and Litigation.

For those dealing with and/or interested in transfer pricing issues and strategies, Duff & Phelps panelists and speakers will discuss optimizing intellectual property across multiple disciplines.

The following three presentations are part of the Tax and Transfer Pricing track:

  • Altera-Egos: UnBEATable IP Planning in an Uncertain World - Tax and transfer pricing professionals will engage in a wide-ranging discussion on a variety of topics related to IP planning. Topics may include the Altera case; aspects of the 2017 Tax Cuts and Jobs Act such as BEAT, GILTI and FDII; the latest on new regulations released by the IRS; and usual suspects such as the outlook for the arm’s-length standard.
  • Data’s Fingers in the Digitizing Economy Pie - How valuable is data? What are Digital PE’s? An update on latest legislation and proposals to tax the digitizing economy with a look at data’s value and contributions in increasingly digitized business models and its impact on tax, transfer pricing and valuation.
  • Blockchain: A Tax and Transfer Pricing Primer - While cryptocurrencies draw media attention, the blockchain is poised to initiate a broader transformation of business, finance, and government institutions. What is blockchain and what are crypto assets? How are these likely to become part of your business? What are the key considerations for tax planning, transfer pricing and valuation?

For more information, please visit: IP Value Summit

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