Proven Signatory Made Easy

Proven signatory

okay let us talk about the kamiko 2020 decision i i guess you pronounce it kamiko which is a mining company which on the day when they won this case actually had this picture published in a number of publications saying that they've won this transfer pricing case so uh who is kamako kamako is one of the world's largest providers of the fuel needed to energize a clean air world which is a wonderful way of pushing nuclear power right clean air world our tier one operations have the license capacity to produce more than 53 million pounds of uranium concentrates annually backed by 461 million pounds of proven and probable with mineral reserves we are also a leading supplier of uranium refining conversion and fuel manufacturing services etc utilities around the world rely on nuclear fuel production products to generate power and safe reliable carbon-free nuclear reactors together we are meeting the ever-increasing demand for clean base load electricity while delivering safe reliable solutions in today's clean air crisis i would say it's it's a hopeful tax right i think the world is still reducing its nuclear dependence and i'm not saying anything about whether that is a good or a bad thing but if you look at the map you can see there in canada they're in the us they're in europe and that's what we're going to talk about and then they're in kazakhstan and australia so the court decision itself was from the federal court of appeal of canada so it's gone through the tax court of canada already and then the government appealed because the government lost in first instance and it was reasoned by three judges as you can see by at the bottom and only one written opinion and the other two concurred so let us see what's going on before we do i just want to set the scenes that you know if you look at tax cuts especially canadian judges they can be very outspoken and i love some of the details they throw in here and there so point two of the order by order dated 29 april 2019 the tax court judge award costs to kabuko in the amount of 10.2 250 000 million dollars um i think that is quite an amount in legal fees it tells you how long this battle has been going and i think the the the first kamiko decision was actually from uh the case started in 2011 right um and then the next point the tax court hearing lasted 69 days my god i mean this is a complicated case one would think kamika called seven witnesses and five expert witnesses the crown called 12 fact witnesses and three expert witnesses so this was a heavy battle the tax court judge devoted the first 197 pages of his reasons to a brief three paragraph introduction now this judge clearly has a problem with this decision being so long and there being so much facts brought into the case and i and maybe he is right because if you look at what he says next despite the lengthy description of the evidence there is very little if any analysis of this evidence and no indication in the first 578 paragraphs of how any particular piece of evidence is relevant or necessary for the issues that were before the tax court and then he goes on and talks about the fact data dump in the next paragraph so i'm not sure whether this is a a a slap towards the um towards the tax court judge or whether this is towards the litigating parties for simply just feeding feeding feeding facts hoping that something relevant might stick but he clearly was not happy with it and if we then go to the facts of the case um it starts with in 1993 the u.s and russia governments executed an agreement that provided the means by which russia could sell uranium formally used in its nuclear arsenal which is a good thing right the net result of this agreement was that a certain quantity of uranium would be offered for sale in the market camaco initially attempted to secure the source of uranium on its own but later took lead in a negotiating an agreement for the purchase of the euro of this uranium by a consortium of companies of which kamika obviously was one and the lead one when the final agreement was signed in 1999 camaco designated its luxembourg subsidiary camaco europe sa to be the signatory to this agreement there's a couple of points here the first one is apparently negotiating this agreement was not that easy because it seemed to have taken a couple of years and kamako tried it by itself but couldn't make it so it had to bring in help right and then camaco designated its luxembourg subsidiary camaco europe sa to be the signatory to the agreement and then and here is this is what the case is about i think you know was this a free giveaway was this happened that was this happening at a realistic price should there be should have been a contingency fees those are the questions here and then the next paragraph just says on 9 september 9 to 9 to 9 cesa which is the euros of the european subsidiary entered into an agreement with eurenco limited and three of his subsidiaries to purchase uranium that your renko would be would receive from 10x so it would buy both from 10x and from your renko and the structure at this point looks like this kamiko and you've got csun luxembourg camaco transferred a business opportunity to cesar and caesar can now buy uranium essentially from the russians and we look at the next of the the rest of the facts in 1999 kamika formed a subsidiary in switzerland this company in 2001 changed his name to chemical europe sa oh i gave sorry um and in 2002 cesar the luxembourg company transfers its business to the swiss company under the access asset purchase and transfer of liabilities agreement therefore cesar transferred to sell the rights that cesar had to purchase uranium from 10x and from yurenko not quite sure at what price but it's it's it's not relevant for this case because remember this is a canadian case right once camaco transferred the business to cisa the next transfer price becomes cisa and luxembourg's problem not not chemicals necessarily cell also purchased kamako's expected uranium production and its uranium inventory so it also bought from camacho it would appear that this arrangement did not include any uranium that was sold by camaco to any customers in canada okay so the rest of the structure looked a bit like this you have cell and you've got the business transfer here sorry and then the last paragraph when the arrangements with teneco 10x and were put in place in 99 the price of uranium was low and subsequent years the price of uranium increased substantially now we're going to talk about this in a moment but i'm just going to flag that there is also chemical us in play here because a lot of the judges or some of the judge's opinions depends on the existence of chemical us but let's talk about the price of uranium because that is essentially what this case is about and this is what the price of uranium looked like right it was this chart is from 1988 and you can see there's been a huge spike somewhere between 2004 and 2010 and and it was high for a couple of years but it seems to be coming down and so the minister added the following amounts to chemicals income for 2003 it out at 43 million you can see it was not much of a rise there 2005 and 2006 there's obviously more of a rise there and that is what what what the the canadian tax authority was after was that that that that profit potential that was realized over there in 2006 and probably i mean they would have gone for 2008 9 10 11 if they won this case right and they made their assessments i mean so they reassessed 2003 5 and 6 but they did the assessments in 2010 through 13. if i remember correctly and you can see the price was still high then so they still saw a significant difference between what kamiko originally um negotiated back in 1999 93 to 99 compared to what what was now being realized as low tax profits in switzerland but this is the picture we need to look at this is what camaco could see when it was doing the transactions when it was negotiated from 93 to 99 and when it was transferring to to to the luxembourg company and the luxembourg company was transferring to the swiss company right in 93 u.s and russia agreed that that russia sells uranium in 1999 this price is still very flat right chemical agrees with russia to buy uranium designates cesar as signatory and in 2002 cesar acquires more or less of the same price of uranium the business uh transfers the business to ceo and again we remember you cannot apply transfer pricing with hindsight this is what the prices looked like and the question is did kamakura know that this enormous spike was gonna come um i don't know i mean maybe because it's their market and they market specialists they might have known they should have known then already back in 1999 when they've done this right so they should have been able to predict the price for uranium six years down the line effectively um [Music] i don't know but so when the judge starts with his decision he says you know the main focus of the tax court judge so that was the previous judge was the application of transfer pricing rules of section 247 of the act we'll get to that in a moment the first issue was whether paragraphs 247 2b and 2d were applicable and that is recharacterization essentially for paragraphs 247 2b and d of the act um the issue for the tax court judge was whether it would have been commercially rational for a person to give up the business opportunity of entering into the contracts with 10x and uranco so did kamaco and canada give away future profits um by signing with the luxembourg entity and the judge said in his decision the evidence recited above so the evidence resided before the tax court judge not not not this federal judge um the evidence presided above leads to the conclusion that the economic benefit of participating in the acu feed agreement so that's buying the uranium was negligible at the time the parties executed the agreement in march 1999 while there is no doubt that cesa and cel was off was a forward opportunity whether that opportunity had been positive or negative dependent on uncertain future events so they didn't know what the price was that's why at least that's what the judge believed a reasonably over the circumstance however is that the atu feat agreement would have had a negative value to see silence sell in march but for the optionality of the agreement so there was an option that they they could buy the uranium at certain prices but they didn't have to right they didn't have to buy the uranium which was negotiated to address that concern the optionality in the atu feed agreement was eliminated in 2001 when they executed with the execution of the fourth amendment so um i guess we should include this in the facts as well that that you know there there wasn't an obligation to buy there was an opportunity to buy and the price was set i believe i'm not 100 sure but the price was set which means that all these profits went to luxembourg um and then to switzerland which is why the canadian authorities wanted to draw that in to canada in this appeal the crown does not challenge any of the factual findings made by the tax court judge rather the crown adopts a broad view of paragraphs 247 2b and d of the act and submits that camacho would not have entered into any of the transactions that he did with caesar and cl within with any arms length person so they say you know if these weren't our subsidiaries they never would have done that and then and and you know there's the issue of well clearly the canadians were triggered by by by the future profits of the deal because if there were future losses they may not have been they might not have cared about it but there is also the issue of you know if you have a contract that you can buy uranium from 10x and and and and whatever the other company was called um are you just going to give that away for free if that contract is running for 20 years because no one knows what the price of uranium does in 20 years think about price of oil how it's gone in the past 20 years it's gone from very low to extremely high to almost zero right the the these are long periods of time and it's an opportunity that you're giving away and anything could happen i'm not sure whether um the judge does not have a point here but if we look at the transfer pricing adjustment um so this is the text of this article 247 that that they keep on referring to it says where a taxpayer or a partnership and a non-resident person with whom the taxpayer or partnership or a member of the partnership does not deal at arm's length so where they where where they do not deal at arm's length and they are participants in a transaction or a series of transactions and the transaction or series would not have been entered into between persons dealing at arm's length and can reasonably be considered to have been entered into primarily for bona fide purposes other than to obtain a tax benefit if you can't do that any amounts that but for the section 245 but for the section 9 section 245 would be determined for the purpose of this act in respect of the taxpayer or the partnership for a taxation year or fiscal period shall be adjusted to the quantum or nature of the amounts that would have been determined if and then they say um you know if these were unrelated parties so it is language which reminds you very much of article 9 of the oecd model convention right if you entered into a transaction that you only would have ended it will be entering into because you are related but you never would have done with the unreal parties then the tax authorities can adjust okay and then paragraph d where article 247.2b this is one that we've just read applies the transaction or series entered into between the participants had been the transaction or series that would have been entered into between persons dealing at arm's length under terms and conditions that would have been made between the persons dealing at arm's length so this is the paragraph that allows re-characterization and this is what the canadian authority said they said you know what um no one no one would have entered council would not have entered into this kind of transaction with any unrelated party therefore we can set this transaction aside and simply allocate the income from csa and cl to camco which is effectively what they have done