by Doug Schwerdt, WTP Advisors

The Queen v. GlaxoSmithKline Inc. – After two decades, still no resolution in Canada

Please click on the link for the News on the case, and read below for the Insights.

CRA and the OECD

The Supreme Court of Canada (SCC) rejected the CRA’s narrow “transaction-by-transaction” approach. What was the CRA thinking? Clearly, the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines) state “there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated adequately on a separate basis”. It seems Canada may have forgotten about its OECD membership. At least the CRA of today, in publishing TPM-14, fundamentally agrees with the 2010 version of the OECD Guidelines (although it took the CRA 2.5 years to make this public acknowledgment).

Witholding Taxes

The SCC decision opened up a can of worms, specifically, the issue of withholding taxes. GSK-Canada’s purchase price of the ranitidine from a related Swiss company Adechsa S.A. (Swissco) included some of the benefits and rights of its license agreement with Glaxo Group Ltd. (Glaxo Group). In other words, GSK-Canada was paying for some of the benefits of the license agreement (I.e., patent, trademark, access to new products, the right to the supply of raw materials and materials in bulk, marketing support, and technical support for setting up new product lines) through the ranitidine purchase price. No withholding is required on the purchase of the ranitidine, whereas royalties are subject to a withholding tax. In looking at the total payments for the ranitidine plus license agreement benefits, GSK-Canada could have effectively paid for a portion of its licensing rights through the purchase price of ranitidine, and avoided some withholding taxes. How would the court determine the arm’s-length price for ranitidine when rights and benefits under the license agreement are linked to the price paid for the tangible property?