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Glaxo Canada Wins Key Transfer Pricing Case

by Mike Godfrey,, Washington

22 October 2012

Canada's highest court has backed pharmaceuticals giant GlaxoSmithKline Plc in a landmark battle over the use of transfer pricing rules to reduce its federal tax bill.

The case, heard at the Supreme Court, relates to the purchase by the Canadian subsidiary of GlaxoSmithKline of an active pharmaceutical ingredient between 1990 and 1993. The ingredient, ranitidine, was purchased from an affiliated Swiss company for more than ten times the manufacturing cost and five times the maximum paid by two other generic drugmakers at arm's length. Glaxo Group owned the patent for ranitidine and granted rights under the patent and trademark to Glaxo Canada under a Licence Agreement. The transfer prices of ranitidine were set by a Supply Agreement. The combined effect of these two agreements enabled Glaxo Canada to purchase the ingredient and market it under the trademark of its successful stomach ulcer drug Zantac.

Glaxo Canada's tax affairs for the years 1990-1993 were subsequently reassessed by the Canadian Revenue Agency (CRA) on the basis that the prices Glaxo paid for ranitidine were greater than would have been reasonable had they been dealing at arm’s length. The reassessment increased Glaxo Canada’s income by the difference between the highest price paid by generic pharmaceutical companies and that paid by Glaxo Canada for ranitidine. The result was a CAD51m (USD52m) tax bill, against which Glaxo appealed to the Tax Court of Canada. However, the reassessment was upheld on the basis that the Licence and Supply agreements were to be considered independently, and the case was subsequently taken to the Federal Court of Appeal. When Glaxo was eventually successful at this federal level, the government took the case to the Supreme Court in January.

The Supreme Court was unanimous in its dismissal of the Revenue's appeal, accepting the argument made by Glaxo Canada that the higher price it paid was legitimate and dictated by the licensing agreement. Justice Marshall Rothstein agreed with the Federal Court that the CRA had erred in refusing to take account of the Licence Agreement. It was this refusal that led to the conclusion that the prices paid by the generic companies for ranitidine were comparable to those paid by Glaxo, Rothstein said. These generic comparisons were found not to reflect the economic and business reality of Glaxo Canada and therefore did not indicate a price that would have been reasonable had Glaxo been dealing with its Swiss subsidiary at arm's length.

The saga is not completely over, however. In its judgment, the Federal Court of Appeal had declared that the case should be returned to the Tax Court, for a further re-assessment. Glaxo appealed to the Supreme Court to overturn this decision, but this was rejected and the Tax Court will again take up the case for a re-determination.

This comprehensive report in our Intelligence Report series examines the global and national landscapes in which companies can use transfer pricing to improve their after-tax returns, including summaries of recent developments in design of the corporate supply train, the usefulness of 'offshore' in international corporate tax planning, and a section covering the spread of DTAAs and CFC laws. It is available in the Lowtax Library at and a description of the report can be seen at
TAGS: court | compliance | tax | business | tax compliance | tax avoidance | group taxation | tax authority | agreements | manufacturing | licensing | multinationals | transfer pricing | Canada | Switzerland

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