The Potential Impact Of An Upward Revision In Silver Wheaton’s Effective Tax Rate

Silver Wheaton (NYSE:SLW) received a proposal letter from the Canada Revenue Agency (CRA) last month, in which the CRA proposed to reassess the company’s tax liability for the years 2005-2010. As per the CRA, under the transfer pricing provisions of the Income Tax Act (Canada) pertaining to the income earned by the company’s subsidiaries located outside Canada, the company’s income subject to taxation in Canada should be increased by US $567 million for the years 2005 to 2010. ^[1] Essentially, the CRA proposes to tax the income earned by Silver Wheaton’s foreign subsidiaries at the rates of income tax applicable within Canada for the years 2005-2010. Most of the company’s income generating activities are conducted by Silver Wheaton (Caymans) Ltd., which operates in the Cayman Islands and is not subject to income tax. ^[2] If the CRA’s proposed reassessment materializes, the company could be subject to additional taxes totaling $150 million and penalties totaling $57 million for the years 2005-2010. ^[1] The uncertainty caused by a potential CRA reassessment has negatively impacted Silver Wheaton’s stock price, which has fallen nearly 29% to date since the receipt of the CRA letter by the company on July 6.

Silver Wheaton’s Stock Price, Source: Google Finance

The company management is confident that Silver Wheaton remains in compliance with all relevant tax provisions as per Canadian law. ^[3] However, a point of concern for Silver Wheaton is if the CRA determines that the income from the company’s foreign subsidiaries is taxable at Canadian tax rates going forward. A major contributing factor to the success of Silver Wheaton’s high margin streaming business is the low tax burden because of its existing corporate structure and the low applicable taxes. If the CRA decides that higher taxes will be applicable on the company’s entire income going forward, it could have a major negative impact on the company’s valuation. Though Silver Wheaton has not yet received any notification of such a proposal from the CRA, we will explore the impact of such a scenario on the company’s stock price.

Impact of a Change in Tax Rate on Silver Wheaton’s Stock Price

As per Silver Wheaton’s SEC filings, the company’s income in Canada is subject to provincial and federal tax rates of 26%. ^[2] However, since nearly all of Silver Wheaton’s income is subject to taxation in the Cayman Islands, the company has a very low tax burden. This is reflected in the effective tax rate assumptions currently factored into our model.

See our forecasts for Silver Wheaton’s effective tax rate

If a scenario materializes in which Silver Wheaton’s entire income is subject to a higher tax rate of 26%, the company’s stock price would fall significantly. If we factor in a 26% effective income tax rate starting in 2016, our price estimate for the company’s stock declines by 28% to $12.02. Thus, an upward revision in the company’s effective tax rate would certainly have a major negative impact on the company’s stock price. From Silver Wheaton’s point of view, the company would certainly be hoping that this scenario does not materialize.

See our complete analysis for this scenario here

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1. Silver Wheaton Remains Confident In Business Structure Following Receipt Of CRA Proposal Letter, Silver Wheaton News Release [↩] [↩]
2. Silver Wheaton’s Q2 2015 Earnings Report, SEC [↩] [↩]
3. Silver Wheaton’s Q2 2015 Earnings Conference Call Transcript, Seeking Alpha [↩]