Canadian Lawyer

LEGAL REPORT/Tax The sum of all parts When it comes to transfer pricing, it's all about context. O ften a grey zone of tax law, transfer pricing has sometimes been seen as simply about pricing cross-border transactions. However, it can be a significant tax risk to companies — especially if the Canada Revenue Agency starts sniffing around, as it is increasingly prone to do these days when it comes to this area of transactions. Following a decision from the Supreme Court of Canada last fall, legal experts say companies will need to better manage transactions with an eye to 48 Jan uary 2013 www.CANADIAN making sure the analysis that underlies their transfer pricing methodology is well thought out and documented. The repercussions for failing to do so could be serious, especially since there has been a spike in transfer pricing audits and the CRA has been beefing up its resources in this area. For the uninitiated, transfer pricing works like this: Multinational corporations value goods and services moving across international borders from one corporate unit to another. The prices are frequently managed to reduce a company's global tax costs. Under transfer L a w ye r m a g . c o m pricing, Canadian subsidiaries of foreign companies have to declare how much they pay their parent company for the products and services they import. If they inflate the price paid, the subsidiary can decrease its Canadian profits and pay less tax. Last October, the Supreme Court of Canada released its much-anticipated ruling in Canada v. GlaxoSmithKline Inc. with the pharmaceutical giant emerging the victor after a lengthy appeal process. The SCC was asked to decide whether Glaxo was wrong to charge its Canadian subsidiary higher prices to avoid paying Canadian taxes. The dispute dates back to the early 1990s when Glaxo Canada purchased ranitidine from Adechsa, a foreign affiliate, for between $1,512 and $1,651 per kilogram for sale in Canada under the trademark Zantac. Other generic drug makers purchased ranitidine for between $194 and $304 per kilogram from arm's-length suppliers. The transaction raised a red flag for the CRA and it came to the conclusion that Glaxo was inflating its transfer price for ranitidine and reassessed the company for $51 million in unpaid taxes. Not willing to swallow that bitter pill, Glaxo appealed to the Tax Court of Canada, which dismissed the appeal, but the Federal Court of Appeal allowed it to go forward. The SCC dismissed the appeal and cross-appeal, ruling it was appropriate for the Canadian subsidiary to pay more for pharmaceutical ingredients than a generic drug maker would due to the terms in its licence agreement with GlaxoSmithKline. "It appears that Glaxo Canada was paying for at least some of the rights and benefits under the license agreement as part of the purchase prices for ranitidine. . . ." Justice Marshall Jeff Szuc By Jennifer Brown

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