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On October 18, 2012, the Supreme Court of Canada (SCC) dismissed the appeal and cross-appeal in Canada v. GlaxosmithKline Inc.,2012 SCC 52, a highly anticipated decision dealing with transfer pricing legislation under s. 69(2) (now s.247) of the Income Tax Act. Notably, this is the first tax case heard by the SCC involving transfer pricing. At issue was whether the drug conglomerate charged its Canadian subsidiary inappropriately high prices for pharmaceutical ingredients, resulting in a reduction of taxes paid in Canada.
By way of background, from 1990 to 1993, Glaxo’s Canadian subsidiary paid a Swiss affiliate between $1,512 and $1,651 a kilogram for the active ingredient ranitidine, which it packaged as the stomach ulcer drug Zantac. This price for ranitidine, however, was five times the cost paid by generic drug companies. The difference in pricing was not acceptable to the Department of National Revenue and resulted in Glaxo receiving a reassessment of $51 million of additional taxable income. Glaxo challenged the reassessment at the Federal Court of Appeal. The case then went before the SCC in January 2012.
Glaxo argued that the intercompany price for ranitidine was appropriate, since it was stipulated in a licensing agreement that provided its Canadian subsidiary access to all of its other drugs, and the right to sell brand-name Zantac for a much higher price. In contrast, the Crown argued that only the comparable generic price should be taken into consideration in determining an arm’s length price.
The SCC agreed with Glaxo’s argument that it was reasonable for the Canadian subsidiary to pay more than a generic company because it was receiving other benefits from the global group, including access to a range of patented drugs, as well as the know-how required to get approvals for drug products and to manufacture and sell them. The SCC was not of the view that it was appropriate to compare the price paid by Glaxo with that paid by generic companies, stating that such comparisons “do not reflect the economic and business reality of [the Canadian subsidiary] and, at least without adjustment, do not indicate the price that would be reasonable in the circumstances.”
Although the SCC disagreed with the Crown, it did not decide on a “reasonable” price that should have been paid by Glaxo’s Canadian subsidiary, referring the matter back to the Tax Court.
Related Topics:Transfer Pricing; International Tax
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