GlaxoSmithKline (GSK) v. Canada revenue agency (CRA)

1. GlaxoSmithKline (GSK)v. Canada revenue agency (CRA)

2. Overview • The CRA reassessed Glaxo Canada, GSK’s Canadian subsidiary, for its 1990-1993 tax years. The pharmaceutical company in Canada paid a sister Swiss company in Europe C$1,512 – 1,651 per kilogram for ranitidine, a component in ulcer drug Zantac while other generic drug manufacturers paid C$194 – 304 per kilogram ranitidine. • Tax court of Canada in 2008 agreed with CRA and upheld its assessment of an additional C$51 million in income, characterized as taxable dividend subject to 10% withholding tax under the Canada-United Kingdom Tax convention. • The Federal Court of Appeal overturned that finding, concluding that the Tax Court misapplied the “reasonable in the circumstances” test for determining GSK’s transfer price for ranitidine. • The Supreme court will determine whether the CRA was right.

3. The Arguments GSK’ Arguments: • GSK’s lawyers argued that the real question before the supreme court is what business circumstances are appropriate in determining whether a price paid for a product was reasonable. • Glaxo invented the blockbuster drug, Zantac, for which it charged its Canadian subsidiary 6% royalty to sell in the Canadian market, and required it to pay a specified price for ranitidine from a fixed Swiss supplier. • Glaxo Canada, as distributor, had to determine whether the price charged by the related firm was appropriate based on its business circumstances at the time. Glaxo Canada was entitled to sell the product Zantac and other Glaxo Group products only if it purchased ranitidine from Adechsa or another Glaxo-approved company. So it was bound to the business reality of a bundled series of intra-group transactions or alternatively would be put at a serious competitive disadvantage CRA’s Arguments: • The naked price paid for ranitidine was the sole issue in determining an appropriate transfer price. Business circumstances should not be considered in determining whether the price paid was appropriate. • The price Glaxo paid was five times the price competitors paid and was not a reasonable arm’s – length amount, creating opportunity to maximize GSK’s international profits, by shifting profits to low tax jurisdictions.

4. The supreme Court, overturned the decision of the Tax Court and will now determine whether the assumptions of the CRA where correct. The supreme Court did not reverse the Tax Court of Canada’s decision, it mandated that the file had to be returned tot the Tax Court of Canada for redetermination of the transfer price in accordance with the circumstances. Court Decision/ Opinion

5. This case is an example of unclear regulations around transfer pricing and whether or not business circumstances should be considered by paying an appropriate price for products. The core question of this case is whether the term " reasonable in the circumstances" should refer to standing in the shoes of the taxpayer or not. For further reference to this case, please visit http://news.bna.com/trnl/display/batch_print_display.adp Implications

6. About IPR Plaza IPR Plaza is a web-based platform that bridges the gap between IP law, accounting, tax, transfer pricing and valuation by providing general and profession-specific information on intangibles, as well as, quantifiable valuation models. IPR Plaza is empowered by different leading IP advisory firms. IPR Plaza is headquartered in the Netherlands with representation in other major countries.