On July 26, 2010, the Federal Court of Appeal (“FCA”) overturned one of the most significant transfer pricing decisions in Canadian history in the case of GlaxoSmithKline Inc. v. The Queen1 (the “Glaxo case”). When examined from all avenues, the case yields important conclusions that both practitioners and multinational corporations alike should note when dealing with contentious transfer pricing issues. Specifically, the court held that a comprehensive examination of all relevant facts as well as the entirety of GlaxoSmithKline Inc.’s (“GSK”) business model must be undertaken in order to determine a reliable transfer price.

The adoption of such an approach is important on many levels. The real-world business circumstances in which related parties operate on a daily basis are far different from those of unrelated parties, making it difficult to find a true transfer price attributable to related party transactions. Nevertheless, when allocating profits within a related party setting, one must proceed with the assumption that related parties can indeed operate independently of one another, which creates a fictitious event. In such an environment, any transfer pricing conclusion can be subject to scrutiny and, as the many governments begin to understand the complexities of transfer pricing, we will continue to see increased audit controversy related to the arm’s length standard and increased efforts by companies to avoid double taxation. The Court’s ruling that all factors, including the use of intangibles by related parties, be considered when determining the appropriate transfer price was correct and should serve as a useful precedent for future disputes.


Transfer pricing can be defined as the price that a member of a multinational group charges a foreign related party for goods, services and/or intangibles2. A tax dispute will arise when the tax authority is of the view that the parties set the transfer price too high or too low in order to transfer profits from a high tax jurisdiction to a low tax jurisdiction3. GSK, a Canadian company, is a wholly-owned subsidiary of Glaxo Group, which in turn is a wholly-owned subsidiary of Glaxo Holdings plc. The FCA described Glaxo Holdings as “the ultimate parent of the Glaxo Group of companies,” which “discovered, developed, manufactured and distributed a number of branded pharmaceutical products.4” Glaxo Holdings and Glaxo Group are both United Kingdom corporations. The Glaxo case involved the reassessment of GSK’s income tax returns for the years 1990 to 1993. GSK is the Canadian distributor of Adechsa S.A. (“Adechsa”), a related Swiss company.

Contentious Issues

i) Purchase Price of Ranitidine

The dispute focused on the price that GSK paid to Adechsa for ranitidine, an active ingredient found in Zantac, a popular drug used to treat and prevent stomach ulcers. The Minister of National Revenue (“MNR”) believed that GSK had paid an excessive amount ($1,600 per kilogram) for this active ingredient pursuant to subsection 69(2) of the Income Tax Act (“ITA”). MNR based its argument on the price that generic drug companies, such as Apotex Inc. and Novopharm Ltd., were paying third party manufacturers for the same product, which ranged from $200 to $300 per kilogram. MNR originally increased the income of GSK for the years in question by approximately $51 million, which represents the difference between the prices paid by the generic companies and GSK for their ranitidine. Further, MNR assessed GSK under Part XIII of the ITA with respect to GSK’s failure to withhold tax on dividends deemed to be paid to a non-resident shareholder.

GSK's position was that the generics were not an appropriate comparator for two reasons, namely:

  1. GSK's actual business circumstances were wholly different from those of Apotex and Novopharm, such that the transactions were not comparable within the meaning of subsection 69(2) of the ITA and the CUP method;
  2. The ranitidine that GSK purchased from Adechsa was manufactured under Glaxo World's standards of good manufacturing practices, granulated to Glaxo World standards, and produced in accordance with Glaxo World's health, safety, and environmental standards.

GSK submitted that independent third party licensees in Europe, which purchased the same ranitidine under the same set of business circumstances as GSK, were the best comparators.

ii) Contractual Agreements

The Glaxo case was centered around two contractual agreements: i) a Supply Agreement between GSK and Adechsa for the purchase of ranitidine; and ii) a License Agreement between GSK and the Glaxo Group. Under the License Agreement, GSK paid a 6% royalty to the Glaxo Group for the rights to certain intangibles and services. These intangibles included trademarks as well as marketing support, technical assistance and registration materials. Access to such intangibles and services were required to assist GSK in selling its drug in the Canadian market at a “premium”.

GSK argued that both the Supply Agreement with Adechsa and the License Agreement with Glaxo Group should therefore be considered, and a failure to do so would not reflect the economic realities of GSK. Conversely, MNR argued that the two agreements were to be looked at separately, and that the only transactions relevant to the case were those with Adechsa.

The Tax Court Decision

The Tax Court of Canada (“TCC”) has often stated that the comparable uncontrolled price (“CUP”) method offers the most direct way to determining an arm's length price. The transfer price is set by reference to comparable transactions between a buyer and a seller who are not associated enterprises. The TCC concluded that the CUP method was the preferred method and that the price paid to Adechsa was not reasonable. Rather, it determined that Apotex and Novopharm were the appropriate comparator and that the “reasonable” price for ranitidine was the highest price paid by the generic drug companies with a $25 adjustment to account for the fact that GSK was buying granulated ranitidine, while the generic drug companies were not.

The TCC also ruled that the License Agreement should not be considered when determining the amount that would have been reasonable in the circumstances if the non-resident person and the taxpayer had been dealing at arm’s length because the Supply Agreement and the License Agreement covered separate matters.

The Federal Court of Appeal Decision

A ruling on the Part XIII5 assessment hinged heavily on the findings regarding the subsection 69(2)6 assessment, namely, whether the prices paid by GSK to Adechsa for ranitidine would have been reasonable in the circumstances if GSK and Adechsa had been dealing at arm’s length. Thus, if the Court were to find that the TCC correctly ruled on the subsection 69(2) issue, the TCC’s ruling with respect to Part XIII would also be upheld.

The FCA unanimously held that the TCC erred in failing to consider the License Agreement between GSK and the Glaxo Group. It decided that a determination of whether or not the purchase price of the ranitidine was reasonable would need to factor in all relevant circumstances which an arm’s length purchaser would have had to consider5. In coming to this conclusion, the Court relied on the test enunciated in Gabco Limited v. Minister of National Revenue6:

It is not a question of the Minister or this Court substituting its judgment for what is a reasonable amount to pay, but rather a case of the Minister or the Court coming to the conclusion that no reasonable business man would have contracted to pay such an amount having only the business considerations of the appellant in mind.

In the Court’s opinion, the Gabco test requires an inquiry into those circumstances which an arm’s length purchaser, standing in the shoes of GSK, would consider relevant in deciding whether it should pay the price paid by GSK to Adechsa for its ranitidine. Hence, the test mandated by subsection 69(2) does not operate regardless of the real business world in which the parties to a transaction participate.7

The Court identified a number of “circumstances” which supports the contention that the License Agreement was a crucial consideration in determining the amount that would have been reasonable in the circumstances if the parties had been dealing at arm’s length. These circumstances “arose from the market power attaching to Glaxo Group’s ownership of the intellectual property associated with ranitidine, the Zantac trademark, and the other products covered by its License Agreement with GSK.”8 In light of these circumstances, any arm’s length party would have had to consider the contents of the License Agreement in deciding whether or not to pay the price set by Adechsa for the sale of Zantac ranitidine9.


The FCA set aside the TCC’s decision and returned the matter to the TCC for rehearing and reconsideration of the matter in light of the FCA’s reasons. The FCA’s decision illustrates the complexities involved when determining whether or not a transfer price paid between related entities is reasonable. Such a determination must take into account all relevant circumstances that would factor into any purchaser’s decision in order to reflect the real-world circumstances in which such contracts are made. In the case of GSK, the active ingredient ranitidine was purchased by GSK in conjunction with a License Agreement affording GSK the right to use and sell several Glaxo products, including Zantac products. The FCA held that the License Agreement should be considered conjointly with the cost of the ranitidine. Thus, the Court acknowledged that the significant brand power associated to the drug affords the Glaxo Group a great deal of bargaining power when negotiating transfer pricing transactions, regardless of whether they are dealing with a related or arm’s length party. While the adoption of an approach factoring real-world business circumstances was a necessary one, this less mechanical method of calculation makes it less likely that multinational corporations and governments will arrive at the same outcome. The intricacy of a case by case factual analysis along with the Government’s complete disregard for the value of intangibles ensures that similar transfer pricing disputes will arise.