Wheaton Precious Metals Reaches Settlement on Canadian Tax Dispute Regarding Foreign Income

Wheaton Precious Metals Corp. has reached a settlement with the Canada Revenue Agency which provides for a final resolution of Wheaton’s tax appeal in connection with the reassessment under transfer pricing rules of the 2005 to 2010 taxation years related to income generated by the Company’s wholly-owned foreign subsidiaries, Wheaton International, outside of Canada.

Wheaton is the leading company in the precious metals streaming business, essentially providing up-front financing to mining companies looking to build mines. In return, it earns the right to buy silver and gold output from those mines at a heavily discounted price, which it sells on for a profit. When Wheaton earns money from mines outside Canada, income is reported through foreign subsidiaries and Wheaton does not pay tax on it in Canada.

The CRA essentially thinks this is tax avoidance, and earnings should be taxed according to transfer pricing rules in Canada’s Income Tax Act.

After the CRA went through Silver Wheaton’s records from 2005 to 2010, it determined there is US$715 million of taxable income that wasn’t taxed, which works out to about US$150 million in unpaid tax. Add in US$57 million of transfer pricing penalties, and Wheaton were liable to pay more than US$200 million.

According to the settlement foreign income on earnings generated by Wheaton International will not be subject to tax in Canada. Instead the service fee charged by Wheaton for services provided to Wheaton International will be adjusted to include capital-raising costs associated with funding of streaming transactions. The mark-up applied to Wheaton’s cost of providing services to Wheaton International, including the above capital-raising costs, will be increased from the current 20% to an agreed 30%.

The additional service fee will result in increased income subject to Canadian tax.

Transfer pricing penalties in the Reassessments will be reversed and interest will be adjusted, subject to some minor adjustments.

The argeed transfer pricing principles will apply to all taxation years after 2010, including the 2011 to 2015 taxation years which are currently under audit and on a go forward basis.

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