Canada: Canadian Court Overturns Decision on International Pharmaceutical Transfer Pricing Case

Last Updated: September 2 2010
Article by John Tobin

The Canadian Federal Court of Appeal recently overturned the Tax Court of Canada's 2008 decision regarding the international transfer pricing of cross-border supplies of pharmaceutical ingredients in the case of GlaxoSmithKline Inc. v. Canada. At issue was the price GlaxoSmithKline (Glaxo Canada) paid to a related non-resident supplier for the drug ranitidine, the active pharmaceutical ingredient in the stomach ulcer drug Zantac. The Tax Court had accepted the Canada Revenue Agency's position that Glaxo Canada had paid an unreasonable amount for the ranitidine, thereby adding some $51 million to Glaxo Canada's income for the years in question.


Under a supply agreement with the supplier for the purchase of ranitidine, Glaxo Canada had paid between $1,512 and $1,651 per kilogram between 1990 and 1993. The Tax Court found that generic drug companies had paid between $194 and $304 per kilogram during the same period for substantially the same drug (although not produced in Glaxo Canada's own facilities). Separately, Glaxo Canada had entered into a licence agreement with its parent company, Glaxo Group Limited. The licence agreement provided for the right to use the parent's trademarks and patents, including the right to market ranitidine under the Zantac brand, as well as provide access to a portfolio of other drugs. Glaxo Canada agreed to pay Glaxo Group a 6% royalty on net sales of Zantac and other drugs.

The Tax Court Decision

At trial, the Tax Court considered the application of former subsection 69(2) of the Income Tax Act, which provided that the deductibility of amounts paid to a nonresident related party is limited to an amount that would have been "reasonable in the circumstances." The trial judge relied on the Supreme Court of Canada's decision in Singleton v. Canada and held that the licence agreement was not to be considered when determining the reasonableness of the price paid under the supply agreement because the two agreements covered separate matters. Using this approach, the trial judge used the prices that generic drug companies paid for their purchases of ranitidine as comparables and ruled that the reasonable price for Glaxo Canada to pay the supplier was the highest price paid by the generics for their supply of ranitidine plus a small adjustment.

The Federal Court of Appeal Decision

On appeal, the Federal Court of Appeal (FCA) overturned the Tax Court's decision regarding the relevance of the licence agreement. It found that the trial judge had erred in law by failing to apply the proper test and had erroneously equated "fair market price" with the "reasonable in the circumstances" test set out in Gabco Limited v. MNR. The FCA held that what is reasonable in the circumstances "requires an inquiry into those circumstances which an arm's length purchaser, standing in the shoes of [Glaxo Canada], would consider relevant" in deciding a reasonable amount to pay for ranitidine.

The FCA identified five circumstances that made the licence agreement a crucial factor in determining the amount that would have been "reasonable in the circumstances" if Glaxo Canada and the supplier had been in an arm's-length relationship:

  1. Glaxo Group owned the Zantac trademark and would own it even if Glaxo Canada was arm's length.
  2. Zantac (sold under that brand name) commanded a premium in the marketplace over generic ranitidine drugs.
  3. Glaxo Group owned the ranitidine patent and would have owned it even if Glaxo Canada had been in an arm's-length relationship.
  4. Without the licence agreement, Glaxo Canada would not have been a position to use the Zantac trademark or the ranitidine patent. Therefore, the only other possibility available to Glaxo Canada would have been to enter the generic market, where the barriers to entry would have been high, with established companies already well-positioned.
  5. Without the licence agreement, Glaxo Canada would not have had access to Glaxo Group's portfolio of other patented and trademarked products.

The FCA made an important finding for transfer pricing cases. It noted that the particular circumstances of the case arose through Glaxo Group's ownership of specific intellectual property rights associated with the drug, which were granted to Glaxo Canada, and not from the non-arm's-length relationship between Glaxo Canada and the supplier or Glaxo Group. However, the FCA chose not to render a decision on the appropriate amount of the transfer price. Instead, the matter was sent back to the Tax Court for redetermination with instructions to consider the full "business realities" of the case.

Further Considerations

The FCA did not discuss the reasonableness of the amounts paid under the licence agreement and avoided the question of the appropriate allocation to each agreement. It merely stated that the licence agreement is a circumstance that the Tax Court must take into account. The Tax Court's ultimate valuation determination will likely be unable to consider whether the amounts paid under the licence agreement were reasonable in the circumstances because the prices paid under the licence agreement were not in issue before the courts. The only issue raised by Canada Revenue Agency on assessment was whether the payments for ranitidine were too much in the circumstances (i.e., given the royalty rate already set out in the licence agreement). In view of the existing licence agreement, it may well be that Glaxo Canada paid a reasonable price for ranitidine.

The argument made by counsel in the FCA case was intuitively attractive: a reasonable person would pay more to get ranitidine that it can sell as "Zantac" because it expects to get a premium price for its product; however, it is not clear that this argument holds up when the entire relationship is viewed together. Is the price for ranitidine high and therefore justifiable because the royalty rate is low? Or if the royalty rate was "on market," was the price for ranitidine too high?

It may be that, taken as a whole, the combined purchase price for the royalty plus the raw drug is reasonable in the circumstances, but having chosen to split the two agreements among two counterparties, the taxpayer faces the difficult situation of having one part unchallenged and the other reduced.

The FCA decision does not give much guidance to the Tax Court. Given the licence agreement, the Tax Court will find it exceedingly difficult to find an appropriate comparable or to apply normal transfer pricing methodologies. There is unlikely to be a comparable in which an arm's-length party has the rights at a specific level of royalty to market a given product and then buy the raw material from a third party.

In the end, the Federal Court of Appeal has taken the much broader view, consistent with that held by most taxpayers, that the proper approach in assessing transfer pricing disputes is to take into account the full extent of the business and market realities pertaining to the situation. What remains to be seen is how the Tax Court will tackle the difficulties inherent in establishing an appropriate transfer price without guidance on the methodology to adopt or specific instructions on how to deal with the challenges of finding an appropriate arm's-length comparable when there are several contracts (with associated pricing) between several counterparties.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions