* Case dealt with transfer pricing between affiliates
* Did Glaxo charge its Canada unit too much to avoid taxes?
* Court backs Glaxo's argument for higher prices
By Randall Palmer
OTTAWA, Oct 18 The Supreme Court of Canada ruled
on Thursday in favor of GlaxoSmithKline Plc in a tax
case centered on whether the drug conglomerate charged its
Canadian unit excessive prices for ingredients so that it could
avoid Canadian taxes.
Dealing with the taxes of GlaxoSmithKline's Canadian
subsidiary in 1990-93, the case marked the first time that
Canada's top court has dealt with the issue of transfer pricing,
an area of tax law under growing scrutiny worldwide.
Transfer pricing refers to how multinational corporations
value goods and services moving across international borders
from one corporate unit to another. The prices are frequently
managed to reduce corporations' global tax costs.
The court ruled unanimously that it was appropriate for
Glaxo's Canadian unit to pay more for drug ingredients than a
generic drug maker might pay because of benefits that flow to
the unit from its license agreement with GlaxoSmithKline.
GlaxoSmithKline lost on one point, and as a result the case
will be sent back to tax court to decide what a reasonable price
would have been for the Canadian unit to have paid. This price
will be seen as higher than what generic drugmakers would pay.
The ruling "may make it easier for foreign companies to
dodge Canadian tax liabilities," said Art Cockfield, a tax law
expert and professor at Queen's University in Kingston, Ontario.
Multinationals are constantly moving goods, services and
assets across borders, with internal payments flowing among
subsidiaries. By managing the pricing of transfers, companies
can shift profits to low-tax countries from high-tax ones.
Transfer pricing management is legal, but sometimes national
authorities rule against corporations that push too hard.
Global standards call for setting transfer prices at levels
resembling those on the open market. Drug and technology firms -
with intellectual property easily shifted from one country to
another - are often involved in transfer pricing disputes.
The Glaxo case will "substantially influence transfer
pricing jurisprudence in Canada ... There are a bunch of
transfer pricing cases now in the pipeline in Canada," said Al
Meghji, a partner with law firm Osler Hoskin & Harcourt LLP, who
INGREDIENT PRICES EYED
Glaxo Canada, the name of the Canadian unit during the
period referred to in the case, bought ranitidine, used to make
Glaxo's successful stomach ulcer drug Zantac, from a foreign
affiliate for more than 10 times the cost of manufacturing it.
That price was also five times the maximum amount that
generic drugmakers Apotex Inc and Novopharm Ltd (now owned by
Teva Pharmaceutical Industries ) paid for ranitidine.
The Canadian government reassessed Glaxo Canada's tax return
to reflect what a generic company would have paid an
arm's-length manufacturer for the ingredient. Glaxo objected and
took the case to court.
Some, or all, of the ranitidine was made by Glaxo's
Singapore facility, which at the time had a tax rate of zero to
10 percent. Having the Singapore subsidiary book more of the
profits meant the Glaxo group's overall tax burden would be
lower because it would book less income in higher-tax Canada.
Glaxo and the U.S. Internal Revenue Service in 2006 resolved
what was at the time the largest transfer pricing dispute in IRS
history. The company agreed to pay the IRS $3.4 billion in a
case that centered on tax years 1989 through 2005.
In Canada, the Supreme Court agreed with Glaxo's argument
that it was legitimate for Glaxo Canada to pay more than a
generic company because the subsidiary was getting other
benefits from the global company, including access to a range of
patented drugs, and the know-how required to get approvals for
drug products, and to make and sell them.
"It appears that Glaxo Canada was paying for at least some
of the rights and benefits under the license agreement as part
of the purchase prices for ranitidine...," Justice Marshall
Rothstein wrote in the 7-0 decision.
He said it was not appropriate to compare what Glaxo paid
with what generic companies paid. Such comparisons "do not
reflect the economic and business reality of Glaxo Canada and,
at least without adjustment, do not indicate the price that
would be reasonable in the circumstances."
The name of the case is Her Majesty the Queen v.
GlaxoSmithKline Inc (33874)