Canada: Supreme Court Of Canada Releases Decision In Glaxosmithkline Transfer Pricing Case

Last Updated: October 23 2012
Article by PWCs Financial Reporting

On October 18, 2012, the Supreme Court of Canada (SCC) issued its decision in  Her Majesty the Queen v. GlaxoSmithKline Inc. The SCC's decision generally favoured the taxpayer although final resolution was not realized with today's decision.

This being the first transfer pricing case decided by the SCC, the decision will no doubt have far-reaching effects on how the Canadian transfer pricing legislation is interpreted and applied.


Between 1990 and 1993, GlaxoSmithKline Inc. (GSK Canada) purchased ranitidine, the active ingredient in the anti-ulcer drug under the brand name Zantac, from Adechsa, a Switzerland-based related party. A licence agreement conferred rights and benefits to GSK Canada. A supply agreement set the terms and price for the supply of ranitidine. The combined effect of the licence and supply agreements allowed GSK Canada to purchase ranitidine, and manufacture and market the final product under the trademark Zantac.

The Canada Revenue Agency (CRA) reassessed GSK Canada on the basis that the price paid for ranitidine was greater than the amount that would have been paid in arm's length circumstances.

The case was heard by both the Tax Court of Canada (TCC), 1 which decided in favour of the CRA, and the Federal Court of Appeal (FCA), 2 which set aside the decision and returned the case to the TCC for reconsideration. Both parties appealed.

Issueson appeal

The main issue for the SCC was whether it was appropriate for the TCC to apply a transaction-by-transaction approach to determine an appropriate arm's length price for ranitidine without consideration of the overall business realities to GSK Canada, including the rights and benefits available under the licence agreement.

More specifically, the Crown argued that it was inappropriate to consider the licence agreement in the determination of an arm's length price for the purchase of ranitidine. It also submitted that transfer prices should be assessed on a "transaction- by-transaction" basis.

GSK Canada responded that it did not recharacterize or bundle the transactions, but rather considered both agreements because both were relevant to determining the appropriate transfer price (i.e., analyzing the circumstances of the supply agreement included consideration of the licence agreement). This principle (i.e., consideration of relevant circumstances) is endorsed by the Organisation for Economic Co-operation and Development (OECD) Guidelines.

GSK Canada also challenged the FCA order to return the matter to the TCC as this effectively extended the statutory limitation period by giving the Minister another "kick at the can." GSK Canada argued that it had successfully "demolished" the assessment at the FCA and was entitled to have the matter set aside.

SCCdecision and reasons

The SCC held that the "economic and business reality" of a given transaction generally should be considered in setting transfer prices. Specifically, "all circumstances" of a taxpayer that are relevant to the price paid ought to be considered. The Court rejected the Minister's argument that SCC case law required a transaction-by-transaction approach. Rather, Justice Rothstein clarified:

Where there are no related transactions or where related transactions are not relevant to the determination of the reasonableness of the price in issue, a transaction-by-transaction approach may be appropriate. However, "economically relevant characteristics of the situations being compared" may make it necessary to consider other transactions that impact the transfer price under consideration. In each case it is necessary to address this question by considering the relevant circumstances.

In making this determination, the SCC relied heavily on the OECD Guidelines, which, while not controlling, were given significant weight by the Court.

In this instance, the SCC found that there was a link between the licence and supply agreements, such that "the rights and benefits of the licence agreement were contingent on GSK Canada entering into the supply agreement." This was a direct result of:

  •  the broader circumstances of the case: that the Glaxo Group of companies controlled the patent, trademark, and other relevant intellectual property that GSK Canada wished to use; and
  •  the secondary manufacturing and marketing function served by GSK Canada.

Accordingly, "an entity that wished to market Zantac was subject to contractual terms affecting the price of ranitidine that generic marketers of ranitidine products were not." In particular, GSK Canada was paying for at least some of the benefits of the licence agreement through the price it paid for the ranitidine.

On these grounds, the TCC was found to have erred in its refusal to consider the effect of the licence agreement on the prices paid by GSK Canada. Furthermore, the SCC demolished the TCC's argument that the generic comparables represent arm's length prices on the grounds that these comparables did not reflect the "economic and business reality" of GSK Canada.

The SCC, however, agreed with the FCA's decision to return the matter to the TCC to determine the reasonableness of the prices paid by GSK Canada for the ranitidine. Interestingly, in doing so, the SCC offered this guidance on the redetermination that speaks to transfer pricing more generally:

  • Transfer pricing is not an exact science, and that some leeway must be given in determining reasonable amounts. The SCC endorsed the use of a "reasonable range" as a means of supporting and establishing arm's length prices.
  • The respective functions, risks and assets of a Canadian entity vis-à-vis a global group of companies must be taken into consideration.
  • Arm's length prices should be established with regard to the independent interests of each party to a transaction.
  • Higher prices are not necessarily indicative of a non-arm's length relationship.

PwC observations

This is the first SCC decision regarding transfer pricing. Although the Court did not reach a conclusion on the specific pricing issue, the judgment recognizes several important principles:

  • The SCC disagreed with the Crown's argument that the OECD Guidelines "require" a transaction-by-transaction approach. The Court observed that while the transaction-by- transaction approach may be ideal, the OECD Guidelines recognize that it may not be appropriate in all cases.
  • The SCC was clear that the requirement in the OECD Guidelines to consider "economically relevant circumstances" in establishing comparability cannot be ignored. All relevant facts and circumstances must be considered.
  • Determination of arm's length prices should take into account the functions performed, risks assumed and assets used by the parties, specifically GSK Canada and other members of the Glaxo Group. "Transfer pricing should not result in a misallocation of earnings that fails to take account of these different functions and the resources and risks inherent in each."
  • "Transfer pricing is not an exact science" as stated in paragraph 1.45 of the OECD Guidelines; as long as a transfer price is within a reasonable range it should not be adjusted.
  • The behaviour of arm's length parties in similar transactions cannot be ignored. The SCC specifically referred to the existence of ranitidine purchases by third parties from the Glaxo Group at higher-than-generic prices.

Considering the economically relevant circumstances, the SCC found that it is unlikely that comparable uncontrolled prices (CUPs) are available in this instance. However, the SCC set out as fact that some of the rights and benefits of the licence agreement were part of the purchase price of the ranitidine. The SCC has opened the door for the TCC to consider Part XIII withholding tax on a portion of the ranitidine purchase price in its next round of deliberations.


1. For more on the TCC decision, see our In Print, "The Dilemma of GlaxoSmithKline: Unreasonable in the Circumstances?" at

2.  For more on the FCA decision, see our Tax memo "Taxpayer Wins Appeal in Transfer Pricing Case (GlaxoSmithKline) – 'Business Reality' Prevails" at

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
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
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

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