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OTTAWA - The Supreme Court of Canada reserved judgment Jan. 13 in its first-ever hearing of a transfer pricing case, and will take up to 12 months to determine whether the Canada Revenue Agency or GlaxoSmithKline Inc. is correct in its approach to determining an arm's-length price for ranitidine, the active component in ulcer drug Zantac. [Her Majesty the Queen v, GlaxoSmithKline lnc.f Canada Sup. Ct., No. 33874, final arguments heard 1/13/12]
The top court Jan. 13 heard final argument in the CRA's appeal of GlaxoSmithKline Inc. v. Canada, 2010 FCA 201, the ruling by the Federal Court of Appeal favoring GlaxoSmithKline (GSK), and the justices clearly had difficulty with some elements of the cases presented by each party. The seven-member panel also reserved judgment on GSK's cross-appeal of the appeals court's decision to return the case to the Tax Court of Canada for redetermination.
The Supreme Court's ruling is expected to clarify the Income Tax Act's transfer pricing provisions, which have been the subject of limited jurisprudence to date, and particularly to define the specific factors that may be taken into account in determining an appropriate arm's-length price.
The CRA reassessed Glaxo Canada, GSK's Canadian subsidiary, for its 1990-93 tax years on the basis that the price it paid related Swiss company Adechsa S.A. for ranitidine, C$l,512-l,651 (US$1, 497- 1,634) per kilogram, was excessive compared to the C$1 94-304 (US$ 191-300) per kilogram paid by generic drug manufacturers for their supplies of ranitidine from unrelated entities.
The Tax Court of Canada in its 2008 ruling agreed with the CRA' s position and upheld its assesment of an additional C$51 million (US$50 million) in income, characterized as a taxable dividend subject to 10 percent withholding tax under the Canada-United Kingdom Tax Convention. The Federal Court of Appeal overturned that finding, concluding that the Tax Court misapplied the " reasonable in the circumstances" test for determining GSK's transfer price for ranitidine (19 Transfer Pricing Report 367, 7/29/10).
The Supreme Court will determine whether the CRA correctly assumed that a naked price for generic ranitidine is the correct arm's-length comparator, or whether other business circumstances, including use of the Zantac brand name, justify GSK's paying a higher price for ranitidine.
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