Notes to Consolidated Financial Statements
For the years ended December 31, 2014 and 2013
22. Income taxes
A. Significant components of deferred tax assets and liabilities
Recognized in earnings As at December 31 2015 2014 2015 2014 Assets Provision for reclamation $1,572 $75,732 $253,821 $251,045 Foreign exploration and development (782) (807) 5,322 6,103 Income tax losses 88,186 136,294 424,344 335,856 Defined benefit plan actuarial losses — — 5,184 5,813 Long-term investments and other 15,316 1,424 82,273 67,060 Deferred tax assets 104,292 212,643 770,944 665,877 Liabilities Property, plant and equipment (111,080) (1,334) 69,875 182,841 Inventories 1,984 (15,719) 22,574 20,590 Other — (3,102) — — Deferred tax liabilities (109,096) (20,155) 92,449 203,431 Net deferred tax asset $213,388 $232,798 $678,495 $462,446
Deferred tax allocated as 2015 2014 Deferred tax assets $713,674 $486,328 Deferred tax liabilities (35,179) (23,882) Net deferred tax asset $678,495 $462,446
Based on projections of future income, realization of these deferred tax assets is probable and consequently a deferred tax asset has been recorded.
B. Movement in net deferred tax assets and liabilities
2015 2014 Net deferred tax asset at beginning of year $462,446 $224,294 Recovery for the year in net earnings (a) 213,388 246,558 Expense on discontinued operations — (13,761) Recovery (expense) for the year in comprehensive income (669) 3,171 Effect of movements in exchange rates 3,330 2,184 End of year $678,495 $462,446
(a) During the fourth quarter, we reversed amounts related to our deferred tax asset in the US totalling $72,600,000. We determined that it was no longer probable that there would be sufficient taxable profit in the future against which the operating losses and other tax deductions could be used.
C. Significant components of unrecognized deferred tax assets
2015 2014 Income tax losses $194,045 $130,300 Property, plant and equipment 1,904 51,404 Provision for reclamation 25,952 — Long-term investments and other 107,305 85,927 Total $329,206 $217,631
D. Tax rate reconciliation
The provision for income taxes differs from the amount computed by applying the combined expected federal and provincial income tax rate to earnings before income taxes. The reasons for these differences are as follows:
2015 2014 Earnings from continuing operations before income taxes and non-controlling interest $(79,268) $(119,098) Combined federal and provincial tax rate 26.9% 26.9% Computed income tax recovery (21,323) (32,037) Increase (decrease) in taxes resulting from: Difference between Canadian rates and rates applicable to subsidiaries in other countries (197,967) (225,368) Change in unrecognized deferred tax assets 111,575 76,009 Other taxes 2,172 3,430 Share-based compensation plans 1,528 2,094 Change in tax provision related to transfer pricing (35,000) 12,000 Non-deductible (non-taxable) capital amounts (2,362) (8,108) Other permanent differences (1,253) (3,288) Income tax recovery $(142,630) $(175,268)
E. Earnings and income taxes by jurisdiction
2015 2014 Earnings (loss) from continuing operations before income taxes Canada $(959,661) $(840,705) Foreign 880,393 721,607 $(79,268) $(119,098) Current income taxes (recovery) Canada $14,617 $(2,944) Foreign 56,141 74,234 $70,758 $71,290 Deferred income taxes (recovery) Canada $(291,363) $(209,255) Foreign 77,975 (37,303) $(213,388) $(246,558) Income tax recovery $(142,630) $(175,268)
In 2008, as part of the ongoing annual audits of Cameco’s Canadian tax returns, Canada Revenue Agency (CRA) disputed the transfer pricing structure and methodology used by Cameco and its wholly owned Swiss subsidiary, Cameco Europe Ltd., in respect of sale and purchase agreements for uranium products. From December 2008 to date, CRA issued notices of reassessment for the taxation years 2003 through 2010, which in aggregate have increased Cameco’s income for Canadian tax purposes by approximately $3,400,000,000. CRA has also issued notices of reassessment for transfer pricing penalties for the years 2007 through 2009 in the amount of $229,000,000. Cameco believes it is likely that CRA will reassess Cameco’s tax returns for subsequent years on a similar basis and that these will require Cameco to make future remittances or provide security on receipt of the reassessments.
Using the methodology we believe that CRA will continue to apply and including the $3,400,000,000 already reassessed, we expect to receive notices of reassessment for a total of approximately $7,000,000,000 for the years 2003 through 2015, which would increase Cameco’s income for Canadian tax purposes and result in a related tax expense of approximately $2,100,000,000. In addition to penalties already imposed, CRA may continue to apply penalties to taxation years subsequent to 2009. As a result, we estimate that cash taxes and transfer pricing penalties would be between $1,650,000,000 and $1,700,000,000. In addition, we estimate there would be interest and instalment penalties applied that would be material to Cameco. While in dispute, we would be responsible for remitting or otherwise securing 50% of the cash taxes and transfer pricing penalties (between $825,000,000 and $850,000,000), plus related interest and instalment penalties assessed, which would be material to Cameco.
Under Canadian federal and provincial tax rules, the amount required to be remitted each year will depend on the amount of income reassessed in that year and the availability of elective deductions. Recently, the CRA disallowed the use of any loss carry-backs to be applied to any transfer pricing adjustment, starting with the 2008 tax year. In light of our view of the likely outcome of the case, we expect to recover the amounts remitted to CRA, including cash taxes, interest and penalties totalling $232,614,000 already paid as at December 31, 2015 (December 31, 2014 – $211,604,000) (note 11). In addition to the cash remitted, we have provided $332,000,000 in letters of credit to secure 50% of the cash taxes and related interest amounts reassessed in 2015.
The case on the 2003, 2005 and 2006 reassessments is expected to go to trial in the third quarter of 2016. If this timing is adhered to, we expect to have a Tax Court decision within six to 18 months after the trial is complete.
Having regard to advice from its external advisors, Cameco’s opinion is that CRA’s position is incorrect and Cameco is contesting CRA’s position and expects to recover any amounts remitted or secured as a result of the reassessments. However, to reflect the uncertainties of CRA’s appeals process and litigation, Cameco has recorded a cumulative tax provision related to this matter for the years 2003 through the current period in the amount of $50,000,000 (previously $92,000,000). We have reduced the provision to reflect management’s revised estimate which takes into account additional contract information. While the resolution of this matter may result in liabilities that are higher or lower than the reserve, management believes that the ultimate resolution will not be material to Cameco’s financial position, results of operations or liquidity in the year(s) of resolution. Resolution of this matter as stipulated by CRA would be material to Cameco’s financial position, results of operations or liquidity in the year(s) of resolution and other unfavourable outcomes for the years 2003 to date could be material to Cameco’s financial position, results of operations and cash flows in the year(s) of resolution.
Further to Cameco’s decision to contest CRA’s reassessments, Cameco is pursuing its appeal rights under Canadian federal and provincial tax rules.
In 2015, we received Revenue Agent’s Reports (RARs) from the Internal Revenue Service (IRS) pertaining to the taxation years 2009, 2010 and 2011-2012, challenging the transfer pricing used under certain intercompany transactions. The RARs list the IRS’ proposed adjustments to taxable income and calculate the tax and penalties owing based on the proposed adjustments.
The proposed adjustments reflected in the RARs are focused on transfer pricing in respect of certain intercompany transactions within our corporate structure. The IRS asserts that a portion of the non-US income reported under our corporate structure and taxed outside the US should be recognized and taxed in the US. Having regard to advice from its external advisors, management believes that the conclusions of the IRS in the RARs are incorrect and is contesting them in an administrative appeal of the proposed adjustments. No cash payments are required while pursuing an administrative appeal. Management believes that the ultimate resolution of this matter will not be material to our financial position, results of operations or liquidity in the year(s) of resolution.
G. Income tax losses
At December 31, 2015, income tax losses carried forward of $2,177,332,000 (2014 – $1,632,194,000) are available to reduce taxable income. These losses expire as follows:
Date of expiry Canada US Other Total 2020 $ — $ — $1,247 $1,247 2028 94,702 — — 94,702 2029 — 28,440 — 28,440 2030 — 1,661 — 1,661 2031 100,872 24,256 — 125,128 2032 234,093 23,938 — 258,031 2033 273,689 40,808 — 314,497 2034 280,382 22,511 — 302,893 2035 305,950 55,939 — 361,889 2036 — — — — 2037 — — — — 2038 — — — — 2039 — — — — No expiry — — 688,844 688,844 $1,289,688 $197,553 $690,091 $2,177,332
Included in the table above is $615,412,000 (2014 – $434,051,000) of temporary differences related to loss carry forwards where no future benefit is realized.
H. Other comprehensive income
Other comprehensive income included on the consolidated statements of comprehensive income and the consolidated statements of changes in equity is presented net of income taxes. The following income tax amounts are included in each component of other comprehensive income:
For the year ended December 31, 2015 Before tax Income tax
Net of tax Remeasurements of defined benefit liability $2,681 $(666) $2,015 Exchange differences on translation of foreign operations 182,089 — 182,089 Unrealized gains on available-for-sale assets 25 (3) 22 $184,795 $(669) $184,126
For the year ended December 31, 2014 Before tax Income tax
Net of tax Remeasurements of defined benefit liability $(10,930) $2,978 $(7,952) Exchange differences on translation of foreign operations 58,890 — 58,890 Gains on derivatives designated as cash flow hedges transferred to net earnings – discontinued operation (400) 100 (300) Unrealized losses on available-for-sale-assets (707) 94 (613) Losses on available-for-sale assets transferred to net earnings 3 (1) 2 $46,856 $3,171 $50,027