Tax Memo: Taxpayer Wins Appeal in Transfer Pricing Case (GlaxoSmithKline) – “Business Reality” Prevails

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On July 26, 2010, the Federal Court of Appeal (FCA) set aside the Tax Court of Canada’s (TCC’s) May 2008 decision regarding the pricing of the active ingredient, ranitidine, in GlaxoSmithKline’s blockbuster ulcer drug, Zantac. In that decision, the TCC accepted the Canada Revenue Agency’s (CRA’s) argument that the intercompany price of the drug should be based on comparable uncontrolled prices (CUPs) of generic versions of the drug.1

Unlike the TCC, which found that the price of the active ingredient could be established by prices in the generic market – ignoring the fact that the taxpayer’s transaction took place in the branded pharmaceutical market – the FCA found that the business realities, such as the use of the brand name and the higher prices that result, should be taken into account, and bring into question the comparability of those generic CUPs.

Although the FCA set aside the original decision, it would not make the ultimate determination of an appropriate arm’s length price and returned the matter to the TCC for reconsideration.

The Federal Court of Appeal rendered their decision on July 26, 2010. Read this Tax Memo for the proceedings' details and PwC's response.