|
October 26, 2005 No. 2005-12
|
||||||||||||||||||||||||||||
|
|
Glaxo Update — CRA Seeks to Unbundle Transfer Price The
Tax Court of Canada recently decided as a procedural matter that Canadian tax
authorities could travel to the U.K.
to take evidence relating to a transfer pricing case from persons who are
neither resident nor physically present in Canada. Although the court has
not yet addressed the substantive issue in this case, this procedural
decision reveals some interesting details about the case itself, including
the CRA’s proposal to unbundle the transfer price and impose withholding tax.
The decision also illustrates how costly and complex transfer pricing
litigation can be. Background The case, Glaxosmithkline
Inc. v. The Queen (2005 TCC 621), involves the price paid by a Canadian
subsidiary of a pharmaceutical company to a related non-resident company for
an active ingredient used in the manufacture of a prescription drug. The CRA proposes to adjust the transfer price on
the basis that the Canadian subsidiary paid a higher price to the non-arm’s
length vendor for the active ingredient than would have been reasonable if
the companies were dealing at arm’s length. Secondary method and potential unbundling proposed The CRA’s approach to the calculation of the
cost-plus method seems to be to identify (and possibly carve out) payments
for intellectual property such as royalties, whether or not the Canadian
subsidiary made such payments. To the extent that any portion of the transfer price
represented royalties, the CRA states that such an amount should be subject
to withholding tax. The decision does not discuss why or how unbundling of
the transfer price should be performed. In
addition, the CRA seems to be dropping its previous argument for the
imposition of withholding tax on a portion of a transfer price in favour of a
new one. Previously, the CRA argued that a portion of the transfer price
should be considered a deemed or constructive dividend. In this case, it
argues that a benefit has been conferred on the non-resident vendor of the
active ingredient under paragraph 246(1)(b) of the Income Tax Act. KPMG observation Along with
providing insights into the CRA’s challenge of the taxpayer’s transfer price,
this decision offers a glimpse of the potential cost and complexity of
transfer pricing litigation. In this case, the CRA asked over 32,000 questions
and obtained 1,900 undertakings and 1,410 written answers, excluding the
questions and answers provided during the audit. The court’s hearing of the
substantive issue in this case is scheduled to take three and one-half
months, from February to May, 2006. For details, please contact François Vincent, National Leader of KPMG’s Transfer Pricing group in Canada, your KPMG adviser, or any of the following:
|
|||||||||||||||||||||||||||
|
|
KPMG LLP is the Canadian member firm of KPMG International, the coordinating entity for a global network of professional services firms, providing audit, tax, and advisory services, with an industry focus. The aim of KPMG International member firms is to turn knowledge into value for the benefit of their clients, people, and the capital markets. With nearly 94,000 people worldwide, member firms provide audit, tax, and advisory services from 717 cities in 148 countries.
The information contained in this Transfer Pricing 60 Seconds is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.
|
|||||||||||||||||||||||||||