Canada: Case Comment: GlaxoSmithKline Inc. (FCA) - Elusive Valuations of Bundled Transactions: Defining a Standard of Reasonableness in Transfer Pricing


The task of making valuations for transfer pricing involving bundled transactions has always been a daunting one. Placing dollar figures on exchanges between related companies for transactions incorporating a combination of goods, services, and intangibles is a considerable challenge for even the most well-versed tax practitioners.

Adding to the difficulty of making accurate assessments of these transactions is the unavailability of appropriate comparators. Often, due to the uniqueness and the exclusive nature of the combination being exchanged between non-arm's length companies (especially in the case of intellectual property rights), finding the "fair market value" may be impossible to do with any precision.

In the Federal Court of Appeal's recent decision, GlaxoSmithKline Inc. v. The Queen1, light was shed on the standard of reasonableness to be applied to such transfer pricing cases. The Court acknowledged that determinations of what is "reasonable" cannot be reduced to mechanized, formulaic assessments. The real-world business circumstances in which corporations operate should not be divorced from evaluations of whether or not the transfer prices paid were reasonable. To allow otherwise would be to condone a specious appraisal of fair market value in lieu of a genuine acknowledgement of the conditions under which multinational entities do business.


Transfer pricing is defined as "the price that a member of a multinational group charges a foreign related party for goods, services and/or intangibles."2 With increasing globalization, the Canada Revenue Agency (the "CRA"), along with taxing authorities in other countries, has grown concerned by the potential for members of multinational entities ("MNEs") to erode the tax base by transferring profits to jurisdictions with lower tax rates, or to entities that have previously suffered losses.3

In an effort to combat these downward forces on the tax base, government authorities in Canada have established transfer pricing regulations that seek to ensure transfer pricing is not used as a mechanism for tax avoidance by MNEs. Where the CRA determines that a company has priced an inter-company transaction artificially low or high, it can reassess the transaction and in some instances impose a penalty equal to 10% of the transfer pricing adjustment.4

In order to decrease the potential for CRA scrutiny, the prices paid for goods, services and intangible assets, exchanged between related entities, should accurately reflect arm's length standards.5 Difficulty arises in making determinations of what price would prevail in the market in situations where the goods, services, or assets being exchanged are not made available to independent third parties. A further complication is that transfer pricing often involves "bundled transactions", scenarios in which a number of transactions for an assortment of goods, services, and intangibles are combined.6

In GlaxoSmithKline Inc., the issue under appeal involved the reasonableness of a transfer pricing arrangement for such a bundled transaction in the context of the pharmaceutical industry. Specifically, the court had to determine the legal standard mandated by the former section 69(2) of the Income Tax Act ("ITA"), and delineate the factors that are properly included in an inquiry into what was "reasonable in the circumstances."7


GlaxoSmithKline Inc. ("Glaxo Canada") was a wholly-owned subsidiary of Glaxo Group, which was itself a wholly-owned subsidiary of Glaxo Holdings plc. Both parent companies were United Kingdom corporations. Glaxo Holdings was "the ultimate parent of the Glaxo Group of companies ('Glaxo World companies')," which "discovered, developed, manufactured and distributed a number of branded pharmaceutical products."8

During the time material to the appeal, Glaxo Canada sold Zantac, a patented and trade-marked drug prescribed to treat stomach ulcers, in Canada. The active ingredient in Zantac, ranitidine, as well as the Zantac trade-mark, were owned by Glaxo Group, but were licensed to Glaxo Canada for their domestic use.9

The manufacturing of ranitidine was handled by two foreign companies within the Glaxo World companies and sold to Adechsa SA ("Adechsa"), a Swiss resident Glaxo World clearing company. The Swiss company in turn sold it to Glaxo Canada for an amount between $1512 and $1651 per kilogram.10 The transfer price paid by Glaxo Canada was determined according to the "resale-price method". According to this system of pricing, Glaxo World and its distributors agreed that a gross margin of 60 percent would be retained by the distributors, and the ranitidine would be priced accordingly. The starting point for determining the price the distributor would pay was the in-market price for the finished ranitidine product. The lower court used a simplified example to demonstrate this mechanism of price setting: "if the ranitidine product was sold for $10 in Italy, the transfer price would be $4; if the ranitidine product was sold for $20 in France, the transfer price would be $8."11

Elements of the Appeal

At the crux of the appeal were two contractual agreements. The first was a Supply Agreement between Glaxo Canada and Adechsa for the purchase of ranitidine. The second was a License Agreement between Glaxo Canada and the Glaxo Group. Pursuant to the latter agreement, Glaxo Canada paid a 6% royalty on its net sales of Zantac and other drugs in exchange for the following from the Glaxo Group:

  1. the right to manufacture, use and sell products;
  2. the right to the use of the trademarks owned by Glaxo Group, including Zantac;
  3. the right to receive technical assistance for its secondary manufacturing requirements;
  4. the use of the registration materials prepared by Glaxo Group, to be adapted to the Canadian Environment and submitted to the Health Protection Branch ("HPB");
  5. access to new products, including line extensions;
  6. access to improvement in drugs;
  7. the right to have a Glaxo World company sell [it] any raw materials;
  8. marketing support; and
  9. indemnification against damages arising from patent infringement actions.12

The Objection of the Minister

At all times relevant to the appeal, two Canadian generic pharmaceutical companies, Apotex Inc. and Novophram Ltd., purchased their rantidine from arm's length suppliers for an amount between $194 and $304 per kilogram. These prices were, at minimum, $1208 per kilo lower than the rantidine bought by Glaxo Canada from Adechsa.13 The CRA reassessed Glaxo Canada for the taxation years 1990 through 1993 on the basis that it had overpaid Adechsa for the purchase of the drug.14 Under subsection 69(2) of the ITA, the Minister of National Revenue increased Glaxo Canada's income by the difference between the price paid by the generic companies for their ranitidine and that paid by Glaxo Canada for its ranitidine. Further, the Minister asserted Part XIII of the Act against Glaxo Canada for its failure to withhold tax on dividends deemed to be paid to a non-resident shareholder pursuant to subsections 56(2), 212(2) and 214(3) of the ITA.15

The results of the Part XIII assessment hinged on the findings of the assessment under subsection 69(2), namely, "whether the prices paid by Glaxo Canada to Adechsa for ranitidine would have been reasonable in the circumstances if Glaxo Canada and Adechsa had been dealing at arm's length."16 The wording of that subsection follows:

69. (2)  Where a taxpayer has paid or agreed to pay to a non-resident person with whom the taxpayer was not dealing at arm's length as price, rental, royalty or other payment for or for the use or reproduction of any amount greater than the amount (in this subsection referred to as "the reasonable amount") that would have been reasonable in the circumstances if the non-resident person and the taxpayer had been dealing at arm's length, the reasonable amount shall, for the purpose of computing the taxpayer's income under this Part, be deemed to have been the amount that was paid or is payable therefor.17

[Emphasis added]

If it was found that Glaxo Canada did pay a reasonable amount in the circumstances, then the grounds for assessing the withholding tax would fail as the provisions deeming the payment of a dividend would cease to apply.

Position of The Crown

The Crown asserted that the only agreement that should be considered in evaluating the reasonableness of the transfer price was the Supply Agreement – the License Agreement, in its opinion, should be ignored. If accepted, this would effectively shut the door on any effort by Glaxo Canada to rely upon the goodwill value of the Zantac trademarks or the regulatory approval and marketing assistance received from Glaxo World as justification for the price disparity between the amount it paid for rantidine versus the amount paid by the generic companies. This is so because all intangibles were dealt with in the License Agreement. If it were excluded from an assessment of the reasonableness of the transfer price, all benefits conferred therein to Glaxo Canada would not be considered.

The Crown further alleged that even if the License Agreement and the Supply Agreement were taken together, Glaxo Canada failed to prove that a party transacting at arm's length would have paid the same amount for the right to sell Zantac in Canada.18

Position of Glaxo Canada

Glaxo Canada argued that an inquiry under subsection 69(2) requires a trier of fact "to assess whether any reasonable business person, standing in [Glaxo Canada]'s shoes but dealing at arm's length with Adechsa, would have paid the amount paid by [Glaxo Canada]."19 Glaxo Canada insisted that the determination is more involved than simply declaring any price above that of fair market value to be "unreasonable". It demands an analysis of the business circumstances surrounding the transaction.20

As Glaxo Canada asserted, and the Court ultimately agreed, to ignore the License Agreement would be to create "a fictitious business world where a purchaser is able to purchase ranitidine at a price which does not take into account the circumstances which make it possible for that purchaser to obtain the rights to make and sell Zantac."21 As no arm's length party could sell Zantac-branded products without the existence of a License Agreement, it would be improper to exclude it from an analysis of what was "reasonable in the circumstances".22

Decision of the Court

The Federal Court of Appeal unanimously rejected the contention that the License Agreement should be ignored. It decided that a determination of whether or not the purchase price of the ranitidine was reasonable would need to factor in all relevant circumstances which an arm's length purchaser would have had to consider. In coming to this conclusion, the Court relied on the test enunciated in Gabco Limited v. Minister of National Revenue:23

It is not a question of the Minister or this Court substituting its judgment for what is a reasonable amount to pay, but rather a case of the Minister or the Court coming to the conclusion that no reasonable business man would have contracted to pay such an amount having only the business considerations of the appellant in mind.

[Emphasis added]

The Court correctly emphasized that "the test mandated by subsection 69(2) does not operate regardless of the real business world in which the parties to the transaction participate."24

Even if Glaxo Canada and Adechsa had been transacting at arm's length, the Court outlined a number of crucial "circumstances" that would have existed regardless of the parties' relation to each other. These circumstances "arose from the market power attaching to Glaxo Group's ownership of the intellectual property associated with ranitidine, the Zantac trademark, and the other products covered by its License Agreement with Glaxo Canada."25 Any arm's length party would have consequently had to consider the contents of the License Agreement in deciding whether or not to pay the price asked for by Adechsa for the sale of Zantac ranitidine.


The Federal Court of Appeal accepted that there is no magic formula in determining whether or not a transfer price paid between related entities is reasonable. The totality of circumstances that would factor into any purchaser's decision must be carefully analyzed before a conclusion can be drawn; to accept less would be to turn a blind eye to the real-world circumstances in which such contracts are made. In the case of Glaxo Canada, it obtained the active ingredient ranitidine in conjunction with a license for various rights to Glaxo products including the right to sell Zantac branded products. In the Courts view the value of the license should not be considered seperately from the cost of the ranitidine. The Court acknowledged that significant brand power existed in the trademarked drug and, as a result, could afford the Glaxo Group a great deal of latitude in its transfer pricing demands. The favourable bargaining position of the Glaxo Group existed because of its ownership of the intangibles contained under the License Agreement. This was so regardless of whether it was transacting with a subsidiary or an arm's length party.


1. GlaxoSmithKline Inc. v. Canada 2010 FCA 201.

2. Dale Hill & Mark Kirkey, "Recent Developments in Trasfer Pricing" (2005) Gowlings Knowledge Centre at 1.

3. Ibid.

4. Ibid.

5. Dale C. Hill & Jamal Hejazi, "Transfer Pricing and the Pharmaceutical Industry: 2006 in Review" (2007) Gowlings Knoweldge Centre at 10.

6. Supra note 2 at 4.

7. Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.).

8. Supra note 1 at para. 7.

9. Ibid. at para. 9.

10. Ibid. at para. 1.

11. GlaxoSmithKline Inc. v. The Queen, 2008 TCC 324 at para. 47.

12. Supra note 1 at para. 16.

13. Ibid. at para. 1.

14. Ibid. at para. 17.

15. Ibid. at para. 2.

16. Ibid. at para. 23.

17. Supra note 7 at s. 69(2).

18. Supra note 1 at para. 47 and para. 51.

19. Ibid. at para. 40.

20. Ibid. at para. 41.

21. Ibid. at para. 78.

22. Ibid.  at para. 42.

23. Gabco Limited v. Minister of National Revenue (1968), 68 D.T.C. 5210 (Ex.Cr.) at 5216.

24. Supra note 1 at para. 74.

25. Ibid. at para. 80.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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