GlaxoSmithKline - Supreme Court of Canada finds that an offshore affiliate could potentially charge a premium for branded (non-generic) drugs in light inter alia of the OECD Transfer Pricing Guidelines

The previous version of Canada's statutory transfer-pricing rule effectively was engaged by the payment by a Canadian taxpayer to a non-resident affiliate of "an amount greater than the amount...that would have been reasonable in the circumstances if the non-resident person and the taxpayer had been dealing at arm's length...."  The Canada Revenue Agency applied its version of the "CUP" method under this rule to reduce the deduction of a Canadian distributor, for a branded drug ingredient which it bought from an off-shore affiliate, to the much lower price at which generic drug distributors were purchasing the same drug in unbranded (generic) form in arm's length transactions.

Rothstein J. found that it was appropriate to take into account that, even if the taxpayer had been dealing at arm's length with the group members, it very well might have been required, under a licence to use the brand, to pay a higher price than the generic price for the ingredient given that it was distributing the related drug in Canada in branded form - and, in fact, the taxpayer had been required to enter into a licence with these terms with a second offshore affiliate which held the brand rights.  Rothstein J. also indicated that he thought this approach was consistent with the OECD Transfer Pricing Guidelines, which required that, even in the context of a transaction-by-transaction transfer pricing approach, regard must be had for the "economically relevant characteristics" of the arm's length and non-arm's length circumstances to ensure they were "sufficiently comparable."  He referred the dispute back to the Tax Court for a redetermination in light of these broader considerations.

Neal Armstrong.  Summary of GlaxoSmithKline Inc. v. The Queen, 2012 SCC 52 under s. 247(2).