Canadian Firm Pays One-Off Tax Charge Over Barbados Restructuring

by Mike Godfrey, Tax-News.com, Washington

09 January 2009

Gildan Activewear Inc., the Canadian clothing manufacturer and marketer, recently announced that it had reached a final agreement with the Canada Revenue Agency (CRA) with respect to the audit of the company’s tax filings for its 2000-2003 fiscal years.

The company announced last month that, except for a one-time charge, no significant income tax adjustments to previously reported income tax rates or after-tax income for the 2000-2003 fiscal years have resulted from the CRA audit.

Based on the results of the audit, and the outcome of its discussions with the CRA regarding Gildan’s transfer pricing methodology and other audit matters, the company disclosed that it "continues to be comfortable with its income tax provisions for fiscal years subsequent to the period covered by the audit."

The company reported a low consolidated tax rate because the majority of its profits are earned and taxed in Central America and the Caribbean Basin, where its sales, marketing and manufacturing functions are managed and performed.

Gildan has agreed to a one-time tax assessment in respect of the restructuring of its international wholesale business and the related transfer of assets to its Barbados subsidiary in fiscal year 1999.

The assessment has resulted in a charge in the fourth quarter of fiscal 2008, amounting to approximately USD27m or USD0.22 per share, including a provision for provincial taxes.

The company accepted the one-time assessment in order to avoid a lengthy negotiation process with the tax authorities, which could have resulted in prolonged uncertainty with regard to Gildan’s overall effective income tax rate.

The company will also make an additional cash payment of approximately USD17m for income tax liabilities which had previously been recorded and reserved in prior years and reflected in the company’s income tax rate as reported for these years.

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