Transfer Pricing Analysis - Benchmarking & Advance Pricing Agreement

Cameco Corporation is facing the problem of determining the terms of the contract between Cameco and its wholly owned subsidiary for export of products. The company wishes to avoid any future litigation or disputes arising on account of the said transaction and hence is looking for alternative solutions for the same. The possible alternatives are flexible contract, advance pricing agreement, and commissionaire arrangement. The evaluation criteria for the alternatives are certainty in reducing litigation, cost-effectiveness, and simplicity in implementation.

ASSIGNMENTTRANSFER PRICING ANALYSIS –
BENCHMARKING & ADVANCE PRICING AGREEMENT
1

I
TA
TA
Executive Summary..............................................................................3
Introduction..........................................................................................5
Identification of problem......................................................................6
Analysis of problem..............................................................................7
Possible Alternatives............................................................................8
Impact Analysis...................................................................................11
Criteria for Evaluation of Alternatives................................................12
Evaluation of Alternatives..................................................................13
Uncertainities involved.......................................................................15
Analysis of the best alternative..........................................................16
Action Plan..........................................................................................17
Bibliography........................................................................................18
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Executive Summary
Cameco is proposing to enter into marketing agreement1 with Cameco Europe Limited,
Switzerland (wholly owned subsidiary) for marketing its good in Europe. The transaction
falls within the purview of transfer pricing as the said transactions is between two associated
enterprises as the ownership exceeds 26%. The management of the company is seeking to
explore the terms of the agreement in order to mitigate any tax disputes or levy of penalty in
near term or long term. In this regard, various alternatives have been explored to determine
the terms of agreement. (Transfer Pricing, 2018) The alternatives have been detailed here-in-
under:
(a) Alternative-1-Variable Contract Pricing: Under this alternative, the company can decide
on terms and condition of transfer of goods to Cameco Europe Limited at the rate
prevalent in the market i.e. goods are sold at spot price (External CUP).
(b) Alternative-2-Advance Pricing Agreement: Cameco Group can enter into an agreement
with Tax Authorities of both jurisdictions whereby they agree to the terms and transfer
price of goods beforehand and transact.
(c) Alternative-3-Commissionaire Arrangement: Under this alternative, company can enter
into an commissionaire arrangement whereby a fixed commission is paid to Cameco
Europe Limited, Switzerland for its marketing service rendered. The rate of service shall
be determined on the basis of Functions Performed, Risk Undertaken and Asset
employed.
I. Criteria for evaluation the alternatives:
The above alternatives have been tested on three parameters. The snapshot of the test has
been detailed here-in-below:
(a) Reduced Litigation: Best Advance Pricing Agreement;
(b) Cost Effectiveness: Best Variable Contract and Commissionaire Arrangement;
(c) Simple and Easy to implement: Best Advance Pricing Agreement.
II. Selection of the best
On the basis of above analysis, points were allotted to each alternative and the second
alternative ranks 1st among three.
1 Since we are standing in 1999
3

III. Proposed Action Plan
The detailed plan for execution of the aforesaid alternative has been attached as a part of
report. It shall take 3 months to 6 months for execution.
4

Introduction
Cameco Corporation is listed on Canadian (Montreal and Toronto) Stock Exchange. It is one
of the gigantic enterprise engaged in Uranium extraction and processing (Cameco corp,
2018). The company has started its activity in 1988 and is one of the leading Uranium
producers of the world with its headquarter in Canada (Uranium Markets, 2017). The
company is the third largest producer of uranium and accounts for 14% of the world’s
uranium production. Cameo owns mines in different continents and countries and has very
highly efficient quality uranium reserves.
Ever since inception of Cameco, it has been engaged in expansion and diversification and the
first subsidiary of the company was Cameco Gold. The company has gone for vertical
integration and has partnership in GE Hitachi Nuclear Energy and owns 24% stake in Global
Laser enrichment. It also has 100% stake in Zircatec Precision industries (Leo).Further it
holds 31.6% stake in Bruce power and 100% stake in Cameco Europe Limited. The current
structure of the company is detailed here-in-below:
Sl No Name of the company Comment Business Comment
1 Cameco Gold Subsidiary
Engaged in the
business of gold
mining
Associated
Enterprise
2 GE Hitachi Nuclear
Energy Partnership
Nuclear energy
and fuel
processing
3 Zircatec Precision
industries Subsidiary Manufacturing fuel
bundles
Associated
Enterprise
4 Bruce Power Associate Operating nuclear
power reactors
Associated
Enterprise
5 Cameco Europe Limited Subsidiary Marketing Associated
Enterprise
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Identification of problem
The company is facing the problem of determining the terms of the contract between
Cameco and its wholly owned subsidiary for export of products. The company wishes to
avoid any future litigation (Refer Note Below) or disputes arising on account of the said
transaction and hence is looking for alternative solutions for the same. The problem
relates to 1999 and hence we are acting from 1999.
Note: The company is considering a view point that in future tax dispute of base erosion
and profit shifting might not arise on account of shifting of profits to lower tax jurisdiction
i.e Zug , Switzerland.
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Analysis of problem2
Cameco is proposing to enter an agreement with Cameco Europe Ltd in 1999 for the purpose
of expanding its business operations in Europe. The company shall act as a marketing unit of
the Cameco and goods shall be transferred at a transfer price determined under the contract.
The contract shall be binding for a period of seventeen years subject to
addendum/modification as required. The terms of the contract need to pay special attention to
the provisions of transfer pricing and determination of Arm’s Length Price. The company has
identified following problems that might crop up in future if the terms of agreement are not
within the legal corridors of the tax laws of Canada or Switzerland:
(a) Transactions between two associated enterprises shall be carried at Arm’s Length price
in terms of transfer pricing laws;
(b) Differential tax rate in two jurisdictions i.e. 27% (average) in Canada and 10% in
Switzerland;
(c) Shifting of profits to lower tax jurisdiction and thus enjoying tax advantage;
(d) Modification of Terms of contract with the changes in the economic scenario;
(e) Tax Burden on account of tax evasion and corresponding negative sentiments in the
market if Canadian Revenue Agency wins the litigation and fall in prices of share.
(f) Taxation in Canada with no corresponding reduction in Switzerland.
The company under the present circumstance is exploring to decide on the terms of contract
that shall be in the interest of the company and government.
2 Since the said is about the current problem and we are thinking of correcting it retrospectively, we are writing
the current problem and relating it to past
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Possible Alternatives
(a) The first alternative to the problems detailed here-in-above shall be variable price contract i.e
prices shall fluctuate on the basis of changing market conditions. If fixed price contract for
determining the transfer price of transaction between two associated enterprise is undertaken,
the same shall result in accumulating of profit at one location in the backdrop of increasing
spot prices of uranium since 1999 from Us dollar 10 to Us dollar 140. The same shall result
in lesser profit at Canada and higher profit shifted to Switzerland and reduced the tax of
Global group but shall in Base Erosion and Profit Shifting. The possible solution to this
would have been a flexible agreement whereby the prices of the goods would have been
determined on the basis of spot prices prevailing market situation rather than a fixed price
and thus would have resulted in correct transfer pricing as market prices are external
Comparable Uncontrolled Price for the purpose of determining Arm’s Length Price and
would reduce any possible litigation in the near future (Solutions., 2018). The solution has
been explained via an example:
Sl
No Spot Price (Dollar ) Transfer Price Comment
1 30 30
No Tax evasion on
account of transfer price
at Arm’s Length
( External CUP)
2 45 45
No Tax evasion on
account of transfer price
at Arm’s Length
( External CUP)
3 50 50
No Tax evasion on
account of transfer price
at Arm’s Length
( External CUP)
(b) The second alternative that company can opt for is Advance Pricing Agreement. Advance
Pricing Agreement is an agreement between tax authorities and the company where by both
mutually decide and agree to a set transfer pricing methodology in terms of Function
Performed, Risk Undertaken and Asset Employed by each Associated Enterprise to the
transaction. The benchmarking agreed is subject to certain agreed critical assumption and the
agreement shall be null and void if those conditions are violated or negated.
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Further, there are three types of Advance Pricing Agreement:
(i) Unilateral Advance Pricing Agreement: This agreement is entered between government
of one jurisdiction and company in that jurisdiction;
(ii) Bilateral Advance Pricing Agreement: This Agreement is entered into between the
government (Tax authorities) of two jurisdictions and the associated enterprise of each
jurisdiction with their respective tax authorities; (Taxpayers benefits associated with
APA)
(iii) Multilateral Advance Pricing Agreement: This Agreement is entered when more than 2
parties are involved in the transaction. It is an agreement among many governments and
the associated party and government.
Under the present scenario, the company can enter into bilateral or unilateral APA as the
transaction involves two parties. The price set under APA is 5 years with a provision for
rollback of 4 years. The company can opt for any of the APA, however bilateral APA is more
advantageous in terms of tax certainty in both jurisdictions. The APA offers the following
advantages:
 Certainty in determination of Arm’s Length Price of the product;
 Reduced Litigation;
 Cost Effective.in long term ( Tax point of view)
(c) The third possible solution to the company is to enter into a commissionaire arrangement
with Cameco Europe Limited whereby Cameco shall provide commission at a certain
specified rate as decided in terms of the agreement to Cameco Europe Limited for rendering
marketing services in Europe. The company shall act as an independent agent of Cameco
procuring orders but such orders and terms of contract shall not be binding to the company as
the same shall result in fixed place of business for Cameco (OECD releases additional
guidance on attribution of profits to a permanent establishment under BEPS Action 7).
Further, the rate of fees shall be determined on the basis of Functions Performed, Risk
Undertaken and Asset employed by the respective parties to the agreement.
Cameco shall directly dispatch the goods on the basis of order procured by Cameco Europe
Limited from its manufacturing plant.
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Brief summary of alternatives
SL
No Particular Solution
1 Alternative 1 Flexible contract under which the transfer price shall change
according to market price
2 Alternative 2 Advance Pricing Agreement with the government to ascertain
the prices of transaction before hand.
3 Alternative 3
Commissionaire Arrangement whereby the Associated
enterprise shall be paid a fixed commission on the basis of
Functions Performed, Risk Undertaken and Assets employed.
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Impact Analysis
Under the present scenario, the corporate image of the organisation shall be highly impacted
on account of negative news of tax evasion if the transactions are not carried out at Arms
Length. The company image shall be hampered which shall impact its business globally as
huge amount of tax litigation shall be imposed on the company( as the amount involved in the
transaction is substantial). Further, the same shall challenge business ethics, Corporate Social
Responsibility and efficacy of management. The sentiment of investor shall be highly
impacted resulting in falling prices of share of the company.
The problems identified in the above scenario have an impact on the following stakeholders
of the company:
(a) Shareholders: In initial years, though Shareholders shall be highly benefitted on account
of lower tax and higher EPS but the same shall be ephemeral on account of tax scrutiny
and tax litigation, share prices of the company shall fall on account of negative
sentiments in the market for the company. Further, there shall be a tax burden on the
company which may hamper the normal business cycle of the company on account of
cash crunch.
(b) Government: The Government of Canada and Switzerland shall be highly impacted
under the scenario. There shall be a huge loss to the exchequer on account of shifting of
profits of the company to a different jurisdiction. Thus government interests are of major
concern under the present scenario.
(c) Investors: Investors are also highly impacted from the negative news of the company as
majority of the capital invested in the company shall be washed out on account of
inefficacy of management of the company. They are hit as hard as the government.
(d) Other stakeholders: These groups of holders are influenced but the impact is not as hard
or strong as the others. They include customers, suppliers, financers etc.
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Criteria for Evaluation of Alternatives
The criteria for evaluating the proposed alternatives above shall be such that satisfies the
requirement of the organisation and helps in taking an effective solution to the problems of
the company. The criteria that have been important for making decision shall be:
(a) Certainty in reducing litigation: The alternatives shall be such that the litigations and
other legal procedure involved in decision making shall be reduced to minimum.
Further, there shall be a precise estimation of arm’s length price for transfer of goods.
(b) Cost effectiveness : The measure should be most cost effective but reliable in reducing
future disputes and shall avoid any such future event;
(c) Simple and easy to implement: The alternative to be selected must be simple and
there shall not be much hassle in determining the transfer price. Further, the impact on
the group as a whole on account of such alternative shall be minimal.
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Evaluation of Alternatives
Certainty in reducing litigation:
Only alternative 2 i.e. entering into Advance Pricing Agreement shall be able to reduce
litigation to minimum as the same is an agreement with the government and ensures reduced
litigation.
Cost effectiveness
The most cost effective measures are alternative 1 and 3. However, under both these methods
the majority of the profits of the company remains in Canada and shall increase the tax
impact of the Group by significant amount.
Simple and easy to implement
The simplest alternative is alternative 2 as the same have predefined steps under the laws of
government. Further, under the said method there is no need to determine the prices regularly
as in alternative 1. There is also a provision for renewal too.
A summary table is enclosed here-in-under:
Particulars Litigation
reduction
Cost
effectiveness
Simple and easy
to implement Total Points
Variable
Contract 8 9 4 21
Advance Pricing
Agreement 9 6 9 24
Commissionaire
Arrangement 4 9 7 20
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Pros and Cons of recommendation
Sl No Alternative Pros Cons
1 Alternative 1  Cost effective;
 Prices are generally at
Arm’s Length.
 Not simple to
implement and
regular determination
of price is
cumbersome;
 Does not ensure
100% tax certainty.
2 Alternative 2  Prices are generally at
Arm’s Length;
 Easy to implement and
ensures certainty ;
 Reduce litigation
 Not Cost effective.
3 Alternative 3  Cost effective;
 Prices are generally at
Arm’s Length.
 Does not ensure
100% tax certainty;
 Litigations are
involved.
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Uncertainities involved
The major uncertainties involved in the above alternatives are:
(a) Change in economic environment;
(b) New laws of the government;
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Analysis of the best alternative
The best alternative is Alternative 2 i.e. Bilateral Advance pricing Agreement as the same
reduces the scope of double taxation of income in both jurisdiction. It is an agreement
through which company can ensure tax certainty. The bilateral APA is within the legal
borders and has global acceptance. Further, it includes roll back provisions and renewal
provision. Thus, company can ensure a smooth, efficient and tax certain agreement under
which there is a mutual consent of tax authorities (Advance Pricing Arrangement Program
Report, 2017). However, the said process is fraught with cost implications which are one time
investment for a period of 5 years.
The short term impact and long term impact is that there is tax certainty. However, the
application processing takes time but company can opt for a rollback too.
Further, the problems are best solved as prices are determined, tax implications to the group
are maintained at optimal level and chances of litigation are reduced.
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Action Plan
Action Item By whom When
Taking a board decision to
enter into APA
Board of Directors During Board meeting
Communicating the decision
to lower authorities
By Management Post board Meeting
Hiring a Chartered
Accountant or a Certified
Public Accountant
By Management Action Implementation stage
Filing of Application for
prefiling consulation in both
jurisdiction
By Hired CPA Post entering into service
contract
Filing of requisite fee By Management of company Post prefiling consultation
Meeting with tax authorities By management and Hired
CPA
Post payment of fee
Entering into Agreement Between Tax Authorities and
Company
Post discussion and mutual
agreement
Annual compliances By company Annually
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Bibliography
Advance Pricing Arrangement Program Report. (2017). Retrieved August 6, 2018, from
www.canada.ca: https://www.canada.ca/content/dam/cra-arc/serv-info/tax/non-res/apapr2017/
p_rprt2017-en.pdf
Cameco corp. (2018). Cameco. Retrieved August 6, 2018, from www.cameco.com:
https://www.cameco.com/about/history/
Leo, G. (n.d.). Ottawa accuses Cameco of multi-million dollar tax dodge. Retrieved August 7, 2018,
from http://www.cbc.ca: http://www.cbc.ca/news/canada/saskatchewan/ottawa-accuses-cameco-
of-multi-million-dollar-tax-dodge-1.1860079
OECD releases additional guidance on attribution of profits to a permanent establishment under
BEPS Action 7. (n.d.). Retrieved August 6, 2018, from taxinsights.ey.com:
https://taxinsights.ey.com/archive/archive-news/oecd-releases-additional-guidance-on-attribution-
of-profits-to.aspx
Solutions., T. P. (2018). www.transferpricingsolutions.com.au. Retrieved August 6, 2018, from
Transfer Pricing Solutions: https://www.transferpricingsolutions.com.au/blog/to-cup-or-not-to-cup-
a-transfer-pricing-dilemma/
Taxpayers benefits associated with APA. (n.d.). Retrieved August 7, 2018, from www.ey.com:
https://www.ey.com/gl/en/services/tax/international-tax/guide-to-advance-pricing-agreements--
apa----taxpayers-benefits-associated-with-apa
Transfer Pricing. (2018, August 02). Retrieved August 6, 2018, from laws-lois.justice.gc.ca:
http://laws-lois.justice.gc.ca/eng/acts/I-3.3/page-265.html#h-158
Uranium Markets. (2017, july). Retrieved August 6, 2018, from world-nuclear.org: http://world-
nuclear.org/information-library/nuclear-fuel-cycle/uranium-resources/uranium-markets.aspx
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