The Supreme Court of Canada has just granted leave to appeal and cross-appeal in the GlaxoSmithKline transfer pricing case. The Minister of National Revenue reassessed Glaxo Canada on the basis that it had overpaid a Swiss affiliate under a supply agreement for ranitidine, the active ingredient in the Zantac ulcer medication manufactured by Glaxo Canada. During the 1990-1993 taxation years at issue Glaxo Canada paid the Swiss supplier $1,500-$1,650 per kilo for ranitidine. Generic companies were paying arm's length suppliers $190-$300 per kilo for ranitidine at the time. Glaxo Canada also paid an annual royalty of 6% of net sales to its UK parent under a licence agreement for the right to sell the medication under the Zantac trademark as well as for other services and intangibles.
The Tax Court concluded that arm's length pricing was slightly higher than the highest generic pricing. At the Federal Court of Appeal, the case was sent back to the Tax Court for rehearing on the basis that the Tax Court judge had erred in not taking into account all the relevant circumstances, including the fact that, because of the licence agreement, Glaxo Canada could command a premium for Zantac over the generic ranitidine drugs and hence would be willing to pay more for ranitidine.
In seeking leave to appeal to the Supreme Court, the Crown asked for a "definitive statement of the legal principles to be applied in transfer pricing cases," including whether the licence agreement benefits were to be taken into account in determining arm's length pricing.
The taxpayer sought leave to cross-appeal, arguing that the Federal Court of Appeal had erred in returning the matter to the Tax Court because this effectively allowed the Minister to raise new arguments in defence of the reassessments 12 years after the litigation had begun.
In arguing that the case raised issues of public importance, the Crown noted that for each of the 2009 and 2010 fiscal year-ends the Canada Revenue Agency had issued nearly $1.5 billion in transfer pricing reassessments on 1100-1200 files. The Crown asserted that OECD guidelines required that transfer prices be evaluated on a transaction-by-transaction and not on a bundled basis.
Glaxo provides an important opportunity for the Supreme Court to provide guidance in the transfer pricing area, particularly on the degree to which the surrounding circumstances are relevant in determining arm's length pricing on particular trade flows. It is hoped that this case will assist taxpayers in both compliance and dispute resolution in the transfer pricing area.