Canadian Supreme Court Sets up Key Principles in Transfer Pricing

In a case involving The Queen and Glaxo Smith Kline Inc. (GSK), the Supreme Court of Canada has recently released its first verdict on transfer pricing regulations by establishing certain important principles that are vital for Canadian multi-nationa

Sunnyvale, CA (prHWY.com) March 4, 2013 - (Sunnyvale, CA)- In a case involving The Queen and Glaxo Smith Kline Inc. (GSK), the Supreme Court of Canada has recently released its first verdict on transfer pricing regulations by establishing certain important principles that are 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 Glaxo Group.
This agreement gave Glaxo Canada the rights to manufacture, use, and rights to use related technical and marketing support to sell Glaxo Group products, including Zantac. It was also a requirement that Glaxo Canada purchase 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 kg of ranitidine in contrast to the current market price of approximately C$300/kg. Glaxo Canada paid Glaxo Group a six-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 not within the transfer pricing rules. The government argued that the Licence Agreement transactions and Supply Agreement 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 Arms Length Price (ALP). The maximum market price paid by pharmaceutical companies was acknowledged as the Comparable 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 flexibility must be given for the determination of reasonable amount. It agreed that the Licence Agreement added value to the 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
* ensure that their contracts rightly specify, in detail, all the associated party transfers of services, goods and intellectual property.

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