GlaxoSmithKline Inc. (Glaxo Canada) vs Canada

The Glaxo case concerns transfer pricing for the purchase of Ranitidine, a patented pharmaceutical active ingredient used to combat stomach ulcers. The ingredient Ranitidine was discovered by the parent company of Glaxo Canada, located in Great Britain (Glaxo UK) in 1976. Glaxo UK registered the drug that included Ranitidine as “Zantac”, it was approved for sale in Canada in 1981, being launched by Glaxo Canada in 1982.

Between 1990 and 1993, Glaxo Canada purchased Ranitidine from Adechsa S.A., a non-resident affiliate based in Switzerland, for prices ranging from CAD 1,512 to CAD 1,651 per kilogram. During the same period, two Canadian pharmaceutical companies, Apotex Inc. and Novopharm Ltd., purchased Ranitidine from other sources for use in anti-ulcer drugs for prices ranging from CAD 194 to CAD 304 per kilogram from suppliers at arm’s length.

A license agreement conferred rights and benefits to Glaxo Canada and a supply agreement set the transfer prices of Ranitidine. The effect of the two combined agreements allowed Glaxo Canada to buy Ranitidine, put it in a delivery mechanism and market it under the brand name Zantac.

The Canadian Department of National Revenue reassessed Glaxo Canada for the tax years 1990-1993, pursuant to section 69 para. (2) of the applicable Income Tax Act (now sec. 247 para. (2)), on the basis that the prices paid for Ranitidine were higher than an amount that would have been reasonable in arm’s length circumstances. Glaxo Canada appealed to the Tax Court of Canada (“CFC”), where the reassessment was upheld on the basis that the license and supply agreements would be considered independently. The Federal Court of Appeal (“CFA”) allowed the appeal and remanded the case to the Tax Court for the determination of the fair arm’s length price, taking into account the circumstances of the license agreement.

The Crown appealed the FCA’s decision to the Supreme Court of Canada (“SCC”). In its appeal, the Crown argued that the arm’s length price inquiry must focus on the particular good, the particular transaction and the particular parts of that transaction. The Crown argued that this decision, as adopted by the CFA, required the Ministry of National Revenue to accept the circumstances (such as the license with Glaxo UK) as they were, whereas, according to the Crown, the legislation should be seen as requiring the Ministry to ignore such imperfect competition circumstances. The Crown further argued that the CFA’s approach was inconsistent with that of other OECD member countries, leading to significant uncertainty.

Glaxo Canada appealed the CFA’s decision, arguing that the CFA wrongly sent the matter back to the CFC to reassess the arm’s length price, taking into account the appropriate circumstances. Glaxo Canada’s position was that it had successfully demonstrated that the Ministry’s tax assessment was wrong and therefore it was not appropriate to reopen the matter based on an alternative approach. Having concluded that the Ministry’s assessment was not correct, the CFA should have set aside the assessment.

In October 2012, the Supreme Court of Canada ruled in the GlaxoSmithKline Inc. case, concluding that both the Crown’s appeal and Glaxo Canada’s cross-appeal should be dismissed and reaffirming the decision of the Federal Court of Appeal.

The CSC found that the proper application of the arm’s length principle requires consideration of other relevant intra-group transactions and remanded the case back to the Tax Court of Canada to re-determine the arm’s length market price on that basis. Even though this decision confirms that intra-group transactions should not be assessed independently of other relevant intra-group transactions, it leaves open to interpretation a number of questions as to how this should be done in practice.