In a lengthy judgment released on May 30, 2008, the Tax Court of Canada in GlaxoSmithKline Inc. v. The Queen considered whether the price paid by the taxpayer to a related Swiss company for ranitidine, the active pharmaceutical ingredient in ulcer medication sold in Canada by the taxpayer under the brand name Zantac, was "reasonable in the circumstances" under subsection 69(2) of the Income Tax Act (Canada), a predecessor provision to the current transfer pricing rules in section 247 of the Act. The Court endorsed the ordering of methods set out in the OECD's Transfer Pricing Guidelines, concluding that the comparable uncontrolled price ("CUP") method was the preferred method for determining a reasonable price for the taxpayer's purchase of ranitidine, unless there was no comparable transaction.

The Court concluded that the pricing of ranitidine under the supply agreement should be considered without regard to the licensing agreement under which the taxpayer paid a 6% royalty to another related company for the use of intangibles and services related to the sale of Zantac. Based on expert evidence and a consideration of the OECD Guidelines, the Court concluded that third party manufacturers' sales of a generic version of the medication in Canada during the same years was an appropriate comparable using the CUP method. The generic companies and the taxpayers operated in the same economic market, there was no difference in substance between the wholesale ranitidine purchased by the generic companies and the taxpayer, and the generic companies and the taxpayer performed similar functions. In contrast, Glaxo's European third party distributors were not an appropriate comparable using the CUP method (or the resale price method used by Glaxo to set the price of ranitidine to the taxpayer) because the European markets and transactions differed significantly from the Canadian market and transactions and it was not possible to compensate for the differences. As there was an appropriate comparable under the CUP method, the taxpayer's use of the resale price method was rejected, as was its use of the transactional net margin method ("TNMM") as a reasonableness check on the price paid by it for ranitidine.

Taxpayers who deal with transfer pricing issues in their businesses should take heed of the fact that in analyzing its first major transfer pricing case, the Court fully endorsed the OECD's Guidelines, including its recommended ordering of transfer pricing methods, its endorsement of traditional transaction methods over the profit-split method and the TNMM, and its preference for the CUP method over all other methods.

The full text of the Court's judgment is available at:

http://decision.tcc-cci.gc.ca/en/2008/2008tcc324/2008tcc324.html

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