Canada's top court rules for Glaxo in tax case

Thu Oct 18, 2012 5:16pm EDT
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By Randall Palmer

OTTAWA (Reuters) - The Supreme Court of Canada ruled on Thursday in favor of GlaxoSmithKline Plc in a tax case centered on whether the drug conglomerate charged its Canadian unit excessive prices for ingredients so that it could avoid Canadian taxes.

Dealing with the taxes of GlaxoSmithKline's Canadian subsidiary in 1990-93, the case marked the first time that Canada's top court has dealt with the issue of transfer pricing, an area of tax law under growing scrutiny worldwide.

Transfer pricing refers to how multinational corporations value goods and services moving across international borders from one corporate unit to another. The prices are frequently managed to reduce corporations' global tax costs.

The court ruled unanimously that it was appropriate for Glaxo's Canadian unit to pay more for drug ingredients than a generic drug maker might pay because of benefits that flow to the unit from its license agreement with GlaxoSmithKline.

GlaxoSmithKline lost on one point, and as a result the case will be sent back to tax court to decide what a reasonable price would have been for the Canadian unit to have paid. This price will be seen as higher than what generic drugmakers would pay.

The ruling "may make it easier for foreign companies to dodge Canadian tax liabilities," said Art Cockfield, a tax law expert and professor at Queen's University in Kingston, Ontario.

Multinationals are constantly moving goods, services and assets across borders, with internal payments flowing among subsidiaries. By managing the pricing of transfers, companies can shift profits to low-tax countries from high-tax ones.

Transfer pricing management is legal, but sometimes national authorities rule against corporations that push too hard.   Continued...

Signage is pictured on the company headquarters of GlaxoSmithKline in west London July 21, 2008. GlaxoSmithKline announce their half yearly results on Wednesday July 23. REUTERS/Toby Melville