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Why Does A Canadian Company Pay Its Taxes to Switzerland?

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Cameco is a multi-billion Canadian company that mines Canadian uranium, uses Canadian-developed technology, and relies on Canadian transportation system. Cameco employees use the Canadian education system, the Canadian health system, and they rely on the stability and legal protection that a Canadian democracy provides. Former Canadian Deputy Prime Minister, Anne McLellan sits on the board of directors.

Funny thing, though; like many transnational companies, Cameco has decided that it is good business practice to park its profits offshore -- to the notorious tax haven of Zug, a city in Switzerland. Cameco pays the good people of Zug a ten per cent corporate tax rate for their trouble -- instead of a Canadian corporate rate of 27 per cent. Mind you, Cameco doesn't really have any operations to speak in that city. So it is easy money for Zug.

Cameco shareholders have been told that there is a "compelling" business reason to have a subsidiary in Switzerland "to be closer to the European market." But the more compelling reason would seem to be that they have been able to "avoid" or possibly "evade" an estimated $1.4-billion in taxes over the past 10 years, according to a story in the Globe and Mail.

They did this by a tried and true business practice of "transfer pricing." In 1999, Cameco signed a 17 year deal with its subsidiary in Switzerland to supply it with Canadian uranium at the fixed price of about $10 US per pound. The price of uranium has increased considerably since then, but the parent company continued to sell Canadian uranium at the 1999 price. The Swiss subsidiary, in turn, sold it to the ultimate customers at much higher prices.

Comeco also has set up another subsidiary in the tax haven of Barbados, but it is not clear yet what purpose it serves.

Whether Comeco has been legally "avoiding" or illegally "evading" paying their fair share of taxes will be determined by the Tax Court. The Canada Revenue Agency has been auditing and investigating Cameco for years claiming that it has failed to pay $850-million in taxes. And the matter may not be settled for a few more years. Trouble is, tracking down this kind of paper trail costs Canadian taxpayers a lot in staffing and legal fees. And when corporations don't pay their fair share of taxes, it is regular Canadian taxpayers who make up the difference.

Setting up subsidiaries in tax havens to facilitate transfer pricing and profit shifting is a widespread global problem. It has become more difficult to enforce current international tax rules that require "arm's length" pricing in financial transactions between related parties. That's because multinational companies exchange not just commodities, as in the case with Comeco, but intellectual property such as patents and trademarks between related companies. While the CRA can challenge the sweetheart deal price Comeco gave its Swiss subsidiary by comparing it with the world market price for uranium, it is much more difficult to establish a fair market price for a particular patent or trademark.

That is why G20 leaders at the recent Summit in Russia have asked the OECD to implement an action plan on Base Erosion and Profit Shifting to revise global corporate taxation rules so that corporations pay their fair share of taxes to governments where their profits were generated.

It may take several years for this work to be completed. But the party may soon be over for multinational corporations such as Apple, Google and Starbucks, who have played the existing rules in such a way that they have avoided paying almost any taxes to anybody.

The global tax justice movement has succeeded in getting world leaders to take action on the issues of tax havens and tax justice. But you can expect plenty of corporate pushback. That's why public pressure has never been more important to make sure world governments carry through on their corporate tax action plan.