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GlaxoSmithKline Transfer Pricing Decision - What's at Stake? - by Gordon Denusik and Michael Glaser 

Global Tax Adviser


September 11, 2012


Gordon Denusik
Vancounver, Transfer Pricing


Michael Glaser
National Leader, Transfer Pricing


Canadian taxpayers that conduct cross-border related party transactions are eagerly awaiting the Supreme Court of Canada's (SCC) decision in the transfer pricing case The Queen v. GlaxoSmithKline Inc. The SCC heard the case on January 13, 2012, and we expect that the SCC will soon render its judgment. It is hoped that this decision, when delivered, will provide guidance on interpreting and applying Canada's transfer pricing law. This article is a reminder of what's at stake as we await the SCC decision.

The Queen v. GlaxoSmithKline Inc. case involves the determination of the price paid by a Canadian subsidiary (Glaxo Canada) of a pharmaceutical company (Glaxo UK) to a related non-resident Swiss company (Swissco) for ranitidine, the key raw ingredient used in the manufacture of the brand name drug Zantac. Glaxo Canada, which had the license to sell Zantac in Canada, was buying the ranitidine from Swissco at a price that was more than five times higher than that paid by generic manufacturers.


The CRA reassessed Glaxo Canada by increasing its income on the basis that the price Glaxo Canada paid to Swissco was not reasonable in the circumstances; rather the CRA asserted that the price paid should have reflected the price for ranitidine on the open market (i.e., the amount generic drug companies paid for ranitidine).


Glaxo Canada's position was that the price paid to Swissco was reasonable when viewed in light of all economically relevant factors, in particular the related License Agreement and its business of selling branded drugs (e.g., Zantac) as opposed to generic drugs. In order to market and sell Zantac, Glaxo Canada was required, in accordance with the License Agreement, to purchase ranitidine from only approved suppliers, such as Swissco. Glaxo Canada could not have purchased ranitidine from generic suppliers without violating the License Agreement and losing its rights to sell not only Zantac but also a host of other patented and trademarked products belonging to the Glaxo corporate group.


The Tax Court of Canada's (TCC) decision upheld the CRA reassessments. The TCC ruled that the License Agreement was an irrelevant consideration in the determination of the price charged for ranitidine because "one must look at the transaction in issue and not the surrounding circumstances, other transactions or other realities."


However, the Federal Court of Appeal (FCA) rejected the premise of the reassessments and the TCC's decision. The FCA concluded that to determine the transfer price, it was necessary to take into account factors such as the License Agreement and to apply the "reasonable business person" test. The FCA decision stated that the relevant question is "whether an arm's-length Canadian distributor of Zantac would have been willing, taking into account the relevant circumstances, to pay the price paid by [Glaxo Canada] to [Swissco]." The relevant circumstance included the business reality that an arm's-length purchaser was bound to consider whether it intended to sell ranitidine under the Zantac trademark.


How will the Supreme Court rule?
Although the SCC decision is unlikely to advise what the precise arm's-length price is, it will hopefully provide direction and guidance on how an arm's-length transfer price is determined.


Specifically, in determining the transfer pricing of a transaction:


  • Does one consider all circumstances and apply the reasonable business person test, from the perspective of the taxpayer (i.e., the Glaxo Canada Position)?; or
  • Does one ignore the surrounding circumstances of the transaction, and essentially evaluate the transaction on a standalone basis and establish the price to be the open market price (i.e., the CRA Position)?


The difference is significant.


With the CRA Position, the transfer pricing question is simply "What is the arm's-length price?" With the Glaxo Canada Position, on the other hand, the transfer pricing questions include:


  • What are the economically significant factors and circumstances surrounding the transaction?
  • Given these factors, what is a price parties dealing at arm's length would agree to?


Implications if the SCC rules in favour of Glaxo
An SCC ruling in favour of the Glaxo Canada Position would, in our view, be in line with the way many transfer pricing specialists believe transfer pricing should be determined. Specifically, in the business world, reasonable individuals and corporations do take various factors and circumstances into account in deciding whether to undertake a certain transaction and, if so, what price to pay. Accordingly, in our view, using a common-sense business approach, a proper determination of an arm's-length price must consider surrounding factors and the circumstances of the participants.


If the SCC does rule in favour of the Glaxo Canada Position, we would then expect the court's comments to provide guidance as to what economically relevant characteristics should be considered in determining and assessing comparability and pricing. This guidance would result in greater clarity on Canada's transfer pricing rules. If the SCC does rule in favour of the Glaxo Canada Position, it will be extremely interesting to see how the court ties in or reconciles the reasonable business person test to the OECD Transfer Pricing Guidelines. The OECD Guidelines emphasize the importance of factoring in surrounding circumstances in determining an arm's-length price, but the emphasis does not include an explicit reference to a reasonable business person test.


Implications if the SCC rules in favour of the CRA
If, instead, the SCC rules in favour of the CRA Position, then there will likely be a potentially significant upheaval in Canada's transfer pricing landscape. Such a ruling would, in our view, be contrary to the way transfer pricing analyses are generally conducted in Canada and internationally and the way arm's-length parties conduct business.


Individuals and corporations take into account various factors and circumstances in deciding whether to undertake a certain transaction, and what price to pay. A key component to any transfer pricing analysis is therefore the functional analysis, and consideration of economically relevant characteristics. The CRA Position seems to suggest that the functional analysis and consideration of economically relevant characteristics are not relevant; rather one is simply to find the street/generic price for the purchased item.


An SCC ruling in favour of the CRA Position, where economically relevant factors and circumstances are to be ignored, may also result in Canada earning a blemished international transfer pricing reputation perhaps, for example, similar to that currently experienced by Brazil. In Brazil, transfer pricing rules generally do not follow international transfer pricing norms. For example, surrounding circumstances (e.g., market penetration strategy, product characteristic, market conditions, risks borne by the participants, etc.) are generally not relevant for the determination of its transfer pricing. Accordingly, transfer pricing in Brazil is unique, and becomes challenging and difficult, because fitting within a certain margin range, while disregarding the circumstances, is what counts.


Will the SCC also send the case back to the TCC for reconsideration?
Although the FCA rejected the CRA Position and the TCC's decision to ignore the License Agreement, the FCA did not technically overturn the reassessment. Rather, the FCA referred the case back to the TCC, asking the TCC to reassess the matter based on consideration of all relevant factors including, among other things, consideration of the License Agreement's requirement to purchase from Swissco, that Zantac commanded a premium over generic ranitidine drugs, and without the License Agreement Glaxo would not have been able to access the portfolio of other patented and trademarked products.


Glaxo Canada cross-appealed this part of the FCA decision, arguing that, given the FCA's conclusions, it had procedurally erred in referring the case back to the TCC, and should have ruled that the CRA reassessments be set aside.


If the SCC rules in favour of the CRA, then this procedural issue is moot. However, if the SCC rules in favour of Glaxo Canada on the transfer pricing issue, it will be interesting to see the SCC ruling on this procedural matter. If the SCC upholds the FCA ruling on referring the matter back to the TCC, it is expected that the SCC will also give the TCC more direction and guidance on what economically relevant characteristics should be considered at a rehearing. In the event of such a rehearing, it also remains to be seen whether the CRA will be able to introduce any new evidence.


For more information, contact your KPMG adviser.








Information is current to September 11, 2012. The information contained in this publication 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. For more information, contact KPMG’s National Tax Centre at 416.777.8500.

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