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Transfer Pricing At Came-co Corporation Case Solution & Answer

Transfer Pricing At Came-co Corporation Case Solution

Introduction

Laura Anderson, the fund manager at the Sask-hedge Fund, was concerned about the investment in the Came-co Company, as the company was involved in transfer pricing practices. Transfer pricing practices were used by the multinational organization in order to raise their corporate’s income, but these practices were of severe implications for the company’s stakeholders, especially the shareholders or other investors. The stock price of Came-co Company dropped by 20%, as it had to face a lawsuit by the Canada Revenue Agency. The lawsuit claimed that the company had been involved in transfer pricing practices with its Swiss subsidiary (Cameco Europe Limited), thereby avoiding the taxes, as a result of low taxable income. Moreover, it was expected that the lawsuit could increase the company’s tax liability by $800 million. The fund manager had to explain the investment board about the estimate for $800 million tax liability being fair or not, and the impact of the lawsuit over the company’s stock price.

Problem Statement

The fund manager at the Saskhedge Fund was concerned about the impact of lawsuit brought by the Canada Revenue Agency, which could affect the company’s share price.A sit is expected that the lawsuit would increase the company’s tax costs by $800 million. The fund manager had to analyze the fairness in the tax increments and the resulting impact of the tax increments over the stock price.

Company Background

Cameco was the third largest uranium producers of the world, which accounted for 14% of uranium’s worldwide production. (See Appendix 1) The company’s head office was located in Saskatoon, Saskatchewan, which had approximately 65 million pounds of uranium reserves. The company had five mines in Canada, Kazakhstan and the United States. The company was formed in 1988 through a merger between two crown companies, which afterwards went public in 1991. The company had a vertical integration strategy, whereby it bought the business stakes in nuclear fuel processing, power generation and the uranium enrichment business.

Question 1

The Swiss market became profitable due to the low cost uranium from Canada and the rising costs. Over a period of six years, the Swiss market earned approximately $4.3 billion by the end of 2012. Cameco’s Canadian operations were locked to provide uranium at fixed prices in 1999, while the expenses for the wages, mining equipment and the trucks were becoming more costly since earliest stages. These both strengths had led to huge loss incurrences in Cameco’s Canadian operations, which amounted to a total of $1.3 billion within a period of six years.

The company’s major focus was on the benefits and losses through the Canadian operations, as a result of which the governmental and the consolidated tax rate of the company dropped down to a very low of 27% as compared to much higher consolidated tax rate in the earlier years.

The objective of the Canadian Revenue Agency was to align the company’s divisions, which started its exploration on Cameco in 2006. The Agency believed that there was no business reason involved in  low tax structures in Europe, but it was sham plan, aimed at reducing the expenses and ultimately lifting off the company’s tax burdens.

The CRA revealed that the tax benefits generated by the company were much higher than the reported tax benefit of $1.4 billion, and the company’s tax liabilities were increasing from 2003-2007. Appendix 2 shows the tax rate changes due to the differences between the tax rates of Canada, i.e. 27% and the 10% tax rate in Switzerland.

The calculation showed that the company would be obligated $529.69 as means of back taxed by the Canada Revenue agency or $2.06 per share, as aresulting measure from 2008 to 2013’s reassessments. Moreover, the company would have to pay approximately $408 million or half of the claimed-back money, while considering the estimation by the CRA’s reassessments……………………..

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