Canadian Supreme Court Sets up Key Principles in Transfer Pricing
(Sunnyvale, CA)- In a case involving The Queen and Glaxo Smith Kline Inc. (GSK), the Supreme Court of Canada hasrecently released its first verdict on transfer pricing regulations by establishing certain important principles thatare vital for Canadian multi-nationals.
The Queen vs GSK Case: Background
GSK, a Canadian drug distributor, had purchased Ranitidine, an active ingredient for the production of the Zantac.As Glaxo Canada did not have the patent for the ingredient, it signed a licence agreement with its UK affiliate GlaxoGroup.This agreement gave Glaxo Canada the rights to manufacture, use, and rights to use related technical andmarketing support to sell Glaxo Group products, including Zantac. It was also a requirement that Glaxo Canadapurchase ranitidine from a supplier approved by the Glaxo Group.Glaxo Canada thus purchased the ingredient from Adechsa and paid more than C$1500 approximately for one kgof ranitidine in contrast to the current market price of approximately C$300/kg. Glaxo Canada paid Glaxo Group asix-percent royalty.
The Queen vs GSK Case: Analysis & Verdict
The Canadian Revenue Authority reassessed the transaction and found the price paid to be excessive and notwithin the transfer pricing rules. The government argued that the Licence Agreement transactions and SupplyAgreement transactions had to be evaluated independently.After analyzing the case thoroughly, the Tax Court declared that the price paid to Adechsa was not as per ArmsLength Price (ALP). The maximum market price paid by pharmaceutical companies was acknowledged as theComparable Uncontrolled Price.
Rejecting the government’s stance, the Supreme Court of Canada held that the License Agreement was pertinent
for ascertaining the ALP and also acknowledged that Transfer Pricing is not an exact science and some flexibilitymust be given for the determination of reasonable amount. It agreed that the Licence Agreement added value tothe Adechsa-sourced ranitidine over and above the value of generic ranitidine. It said the Licence and Supply
Agreements together gave a “realistic picture” of Glaxo Canada’s profit. Hence, the Canadian apex court referred
the matter back to the tax court for the determination of the exact Transfer Price.
Important Lessons for Canadian Multi-nationals:
The taxpayers must ensure that their transfer pricing documentation is proper. Therefore, business entities must:authenticate the validity of the comparables mentioned in their transfer pricing study, and