On January 13, 2012, the Supreme Court of Canada is scheduled to hear an appeal by the Crown and a cross-appeal by GlaxoSmithKline Inc. (“GSK”) in the first transfer pricing case to be heard by the Court.

The Minister of National Revenue reassessed GSK by increasing its income in its 1990 through 1993 taxation years on the basis that it had overpaid its non-arm’s length supplier – a non-resident company – for the purchase of ranitidine, a pharmaceutical ingredient in a drug marketed by GSK in Canada (Zantac).  During that period, GSK paid between $1,512 and $1,651 per kilogram of ranitidine.  According to the Minister, a reasonable amount for GSK to have paid for ranitidine was the price paid by other pharmaceutical companies that were selling generic forms of the drug (i.e., between $194 and $304 per kilogram).

The Tax Court of Canada agreed with the Minister’s position but made a $25 upward adjustment to the price paid by GSK.  The Federal Court of Appeal set aside the decision of the Tax Court of Canada and ordered that the matter be re-heard by the Tax Court of Canada.

The Supreme Court of Canada granted leave to appeal to the Crown and granted leave to cross-appeal to GSK.  The issues raised in this appeal include the following:

  1. Whether identification of the transaction which is the subject of a transfer price analysis is limited by bona fide legal arrangements of the taxpayer.
  2. Whether transfer prices in independent transactions between a Canadian taxpayer and different entities of a multinational group should be assessed separately or bundled together.
  3. Whether, when conducting transfer pricing analysis in Canada, the arm’s length standard has been displaced by the “reasonable business person” test.
  4. Whether the Federal Court of Appeal erred in returning matter to the Tax Court of Canada for rehearing.

For the written submissions of the appellant, see the factum of the Crown.