| Case-Name: | Canada v GlaxoSmithKline Inc |
| Full-Case-Name: | Her Majesty the Queen v. GlaxoSmithKline Inc. |
| Heard-Date: | 13 January 2012 |
| Decided-Date: | 18 October 2012 |
| Citations: | 2012 SCC 52 |
| Docket: | 33874 |
| History: | Appeal from GlaxoSmithKline Inc. v. Canada. 2010. fca. 201. 2010 DTC 7053. 2010-07-26., setting aside GlaxoSmithKline Inc. v. The Queen. 2008. tcc. 324. 2008 DTC 3957. 2008-05-30. |
| Ruling: | Appeal and cross-appeal dismissed. |
| Ratio: | Under ITA s. 69(2), the price established in a non-arm's length transfer pricing transaction is to be redetermined as if it were between parties dealing at arm's length, and such an exercise may take into account transactions other than the purchasing transactions. |
| Puisne-Justices: | Deschamps, Abella, Rothstein, Cromwell, Moldaver and Karakatsanis JJ |
| Lawsapplied: | Income Tax Act (Canada) |
Canada v GlaxoSmithKline Inc is the first ruling of the Supreme Court of Canada that deals with issues involving transfer pricing and how they are treated under the Income Tax Act of Canada ("ITA").
In 1976, a predecessor of GlaxoSmithKline Inc. ("GSK") discovered the drug ranitidine, which was approved for sale in Canada in 1981 and marketed as Zantac. Ranitidine's primary manufacture was conducted by related companies located in the United Kingdom and Singapore, and it was subsequently sold to Adechsa SA, another related company located in Switzerland, for further sale to other group companies and unrelated distributors at prices dictated by the parent company.[1]
In addition, the following intercompany agreements were entered into by Glaxo Canada:
During its taxation years from 1990 to 1993, Glaxo deducted and remitted withholding tax with respect to royalty payments it made to Glaxo Group Limited under the 1988 agreement, but not with respect to payments to Adechsa under the 1983 agreement, which were considered fully deductible as cost of goods sold.[6]
By 1990, generic drug manufacturers such as Apotex and Novopharm were able to acquire ranitidine on the open market at prices significantly less than Glaxo Canada was paying under its 1983 agreement.[7] The Minister of National Revenue subsequently reassessed Glaxo Canada's 19901993 taxation years under:
Glaxo Canada subsequently appealed the reassessments to the Tax Court of Canada (TCC).
On 30 May 2008, the TCC allowed the appeals, ordering the s. 69(2) and Part XIII assessments to be returned to the Minister for reassessment with respect to a minor pricing adjustment. Otherwise, the approach used in arriving at the assessments was considered to be correct. Rip ACJ (as he then was) identified the key issues in the case as:[11]
He ruled that the comparable uncontrolled price method was the preferred approach to use to establish the arm's length transfer price, subject to adjustment for the issues in dispute.[12] He also ruled that the Part XIII assessments for withholding tax were essentially correct, but subject to a minor pricing adjustment with respect to the drug's granulation.[13]
The TCC ruling was set aside by the Federal Court of Appeal on 26 July 2010. In his ruling, Nadon JA stated the trial judge had erred in the following respects:
The Singleton test applied to a different part of the Act under different circumstances,[17] and the consideration of what is reasonable must be governed by the standard noted in Gabco Ltd v Minister of National Revenue,[18] where Cattanach J stated:
Nadon JA subsequently listed the following "circumstances" of what could be considered as reasonable in the case at bar:[19]
Consequently, in those circumstances, the only possibility open to the appellant would have been to enter the generic market where the cost of entry into that market would likely have been high, considering that both Apotex and Novopharm were already well placed and positioned. Without the License Agreement, the appellant would not have had access to the portfolio of other patented and trademarked products to which it had access under the License Agreement.
The appeal was allowed with costs, setting aside the Tax Court's decision, and the matter was returned to the trial judge for rehearing and reconsideration of the matter in the light of the FCA's reasons.
An appeal by the Crown on the reversal, and cross-appeal by GSK with respect to the case being returned to the TCC for rehearing, were subsequently made to the Supreme Court of Canada, which heard the case on 13 January 2012.[20] [21]
The Crown argued that applying a "reasonable in the circumstances" test, as the FCA did, does not fulfil the conditions of section 69(2), as a price that may be reasonable is not necessarily an arm's-length price.[22] According to the Crown, only those circumstances that would be relevant to parties bargaining at arm‟s length for a particular good should be considered in the analysis,[23] which it asserted was supported by the SCC's rulings in Singleton and Shell Canada Ltd. v. Canada.[24] In its view, other circumstances, such as Glaxo Canada‟s status as a distributor of Zantac, were irrelevant to the consideration of the price paid for ranitidine.[25]
In response to questions from the Justices about the meaning of "reasonable circumstances" in s. 69(2), the Crown submitted that:
As to questions as to whether a hypothetical independent licensee entering into a similar arrangement with Glaxo could be reassessed in the same manner, the Crown responded that such a licensee could be reassessed as not "dealing at arm‟s length" if it was tied into a set price and had no ability to bargain.
In its submission, GSK concurred with the FCA ruling with respect to the inclusion of the License Agreement in determining reasonable circumstances.[27] S. 69(2) should therefore be presumed to situate the parties at arm's length, ultimately asking, "Would they do the deal?"[28] As to questions posed on whether the price paid for ranitidine was a bundled price for tangible and intangible propertythus potentially triggering liability for withholding taxGSK contended that the situation was analogous to luxury brands such as Rolex and Porsche. While there are undoubtedly components of intellectual property embedded in the price of the tangible good, it is not Canadian law or practice to segregate and separately tax the discrete elements.
As to the applicability of the OECD guidelines, GSK stated that there was no dispute between the parties that the issue in question is solely the price of the tangible good rather than its characterization.[29]
In its cross-appeal, GSK submitted that it had demolished the Minister's reassessment by demonstrating that the theory at the heart of the liability determined by the Minister was wrong, and therefore the reassessment must be set aside.[30] To a question posed as to whether the onus was still on the taxpayer to prove that it did not overpay for ranitidine (as the lower courts had not yet addressed the issue), GSK responded that, once it had demolished the Crown's basis for reassessment, the onus shifted to the Crown to show that Glaxo had paid too much.
In reply, the Crown contended that GSK did not demolish the reassessment, and therefore it remained valid and open for reconsideration by the TCC.[31] To the question of whether, if the case were to be sent back to the TCC, any other issue could be argued, the Crown stated that the argument would remain essentially the same, as the generic comparable prices comprised the only available information to support arm's-length prices for ranitidine.
In a unanimous decision by Rothstein J, the appeal and cross-appeal were dismissed.
While s. 69(2) does not state what is a "reasonable amount", the OECD guidelines do provide commentary and methodology pertaining to the issue of transfer pricing. However, the test of any set of transactions or prices ultimately must be determined according to s. 69(2).[32]
It was also noted that the issue as to whether the purchase price includes compensation for intellectual property rights granted to Glaxo Canada had not been specifically argued before the SCC, and could still trigger potential further liability for Part XIII withholding tax. It may still be raised during the subsequent rehearing at the TCC.[36]
The following further guidance was given with respect to the forthcoming redetermination by the trial judge:[37]
The assessments were based on two assumptions:[38]
Only the second could be characterized as having been demolished, but if Glaxo had been successful in establishing that the prices it paid were reasonable, the first would have been demolished as well. As L'Heureux-Dubé J had stated in Hickman Motors Ltd v Canada, the taxpayer's burden is to "'demolish' the exact assumptions made by the Minister but no more".[39] [40]
As Glaxo had previously conceded at the FCA that the court could determine what was the reasonable amount, it was within the FCA's discretion to remit the question to the TCC for that very determination. Accordingly, that aspect of the FCA's ruling was upheld.[41]
There has been little jurisprudence on transfer pricing in Canada, and, being the first time this area had been addressed by the SCC, the judgment was greatly anticipated, not just in Canada,[42] [43] but worldwide.[44] [45] While many tax professionals welcomed the SCC endorsement of a "business reality test", others had been expecting more specific guidance.[46] There was also speculation that the time may be ripe for the Crown and GSK to reach a settlement, rather than spend more time in pursuing a rehearing at the TCC.[47] The case was ultimately settled on 12 January 2015, prior to the TCC's rehearing of the matter, with details of the agreement remaining confidential.[48]
The SCC's statement that an arm's-length price can fall within an acceptable range of prices has also been seen as significant, and consistent with the 2010 OECD transfer pricing guidelines, as it appears to be contrary to the long-standing policy of the Canada Revenue Agency to express a preference for unweighted yearly averages of comparators’ pricing in such circumstances.[49] In addition, the SCC's guidance to the TCC strongly suggests that Canadian courts must keep an eye on the bigger picture in making their transfer pricing determinations, and the determination of arm's-length pricing is quite distinct from the narrower concept of fair market value.[50]
When s. 69(2) was reenacted as s. 247(2)(a) and (c) in 1998, the test as to what was reasonable "in the circumstances" was removed. However, it has been contended that the quoted words are implicit in the comparative exercise mandated by the explicit adoption of the arm's-length principle in subsection 247(2),[51] and the Tax Court of Canada has held that GlaxoSmithKline's reasoning continues to apply to s. 247 cases.[52] S. 247 also contains a recharacterization rule at s. 247(2)(b) and (d) that has yet to be assessed in the Canadian courts.[53]
Most recently, it has been argued that the SCC erred in affirming the FCA's application of a reasonable business person test for the purpose of s.69(2), and that the SCC infused additional uncertainty as to which arm's length test applies (i.e., an empirical arm's length test or a reasonable business person test). These errors may require having the court overrule its decision in order to properly consider the Minister's question about the appropriateness of the reasonable business person test.[54]