TRANSFER PRICING AT CAMECO CORPORATION

Laura Anderson, a fund manager for Saskhedge fund, was studying her portfolio's closing numbers for the third quarter of 2013 for the quarterly review meeting of the investment board. she was particularly concerned about her investment in Cameco stock. Anderson had bought 150,000 shares of Cameco at cdn$23.23 per share in February 2013. the stock was now trading at $18.58, which was a 20 percent loss. in addition to this, the Canada revenue agency (CRA) filed a lawsuit against the firm for tax avoidance, which could result in Cameco having to pay around $800 million in Canadian corporate taxes. Anderson needed to explain to the investment board the implications of the CRA lawsuit on the stock price and advise the board on whether the projected $800 million tax liability was a fair estimate.

Allegations of Tax Evasion by the Canadian Revenue Agency. 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. Based on this finding, CRA reassessed Cameco's earnings and the amount of tax payable for the years 2003 through 2007 The income for the years 2003 through 2007 was revised upwards respectively by $43 million, $ 108 million, and $ 197 million, $243 million, and $708 million. The company had to make a cash payment of $27 million to cover its increased tax liability for 2007 (2012 Cameco consolidated financial statements, accessed from SEDAR on July 6, 2014). 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. Exhibit 4 presents Cameco's consolidated income statements for the years 2003 through 2013. As Anderson studied the Cameco transfer pricing issue in more detail, 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.

What are the regulatory issues involved in this case and what can be done to avoid such issues in the future?