The Lexpert Guides to the Leading US/Canada Cross-Border Corporate and Litigation Lawyers in Canada profiles leading business lawyers and features articles for attorneys and in-house counsel in the US about business law issues in Canada.
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TRANSFER PRICING THE CHALLENGE IN Glaxo centered on the price Glaxo Canada, the Canadian subsidiary of the British-based Glaxo Group Ltd., was paying Adechsa S.A. – also part of the Glaxo Group – to acquire ranitidine, which is the active ingredient in the anti-ulcer drug Zantac. Glaxo Canada was mixing the Glaxo-approved ranitidine with other ingredients and selling the finished pills under the Zantac trade-mark. The deal with the UK parent company required Glaxo Canada to sign a licensing agreement to use Glaxo's intellectual property, including its trade-mark, and its technical expertise. In return, it paid the parent company a 6 percent royalty on its net sales of Zantac. The contract required Glaxo Canada to purchase ranitidine from Swiss-based Adechsa. It did so at a price roughly five times higher than the price two Canadian generic drug manufacturers paid for their ranitidine in purchases from an unrelated company. PHOTOGRAPHY BY PHILIPPE LANDREVILLE For one thing, the additional manpower has permitted the CRA to routinely examine information forms companies are required to fi le on all cross-border non-arm's-length transactions. Akin says that paperwork "has become the roadmap for auditors. "Where they see any kind of substantial activity your audit will routinely include an international tax auditor. And they have seven years to complete the audit compared to the four-year limitation on domestic issues." Canada is phasing in its move to a risk-based system in determining who will be routinely audited, and the CRA is still identifying those it considers at higher risk of non-compliance. The agency has been methodically reviewing all large taxpayers (defined as gross income over $250 million) to assign them a rating of low, medium or high. Only those in the high category will continue to be audited annually. That has led to a new practice: the CRA has been doing "road shows," coming in to meet with large taxpayers to discuss their view of the company's risk profile and provide an opportunity for input. And the CRA has made it clear it does not want to meet only with the tax manager. "They're on to risk management at the board level of these large companies, so they want to talk to senior management like the CFO or president," says Akin. "They want them involved in the risk-assessment analysis and they want them to be aware how CRA are viewing things. "I think they want the upper echelons of the company to be involved with and accountable for their tax filings. This is a guess on my part, but I suspect they've cottoned on to the fact that at the board and CEO level there may be a lower tolerance for tax risk than lower down in the company." Many practitioners complain privately that the enhanced scrutiny and changing system of evaluation has led to a few bumps in the road. One, who agreed to talk on condition of anonymity, says the increased CRA activity is causing more work for clients without any real payoff. "I don't think things are resolving as quickly and as efficiently as they should and, where they are resolving, it's after a lot of work and a lot of time and expense and, frankly, more often than not in a way that's not terribly satisfactory." He says because the webs of transactions that underpin a company's transfer pricing structure are complex, and the government's international auditors don't always have the right industry expertise, the pricing the agency suggests can be wonky. "The government starts off tabling what the right number should be, the taxpayer comes back with what they think should be the right analysis, and then the government responds. Because there is no clear right or wrong response, a lot of times you end up with numbers that are not very satisfying. There's a lot of arbitrariness in the process. "And the quality of the work is not consistent from one taxation service office to another. That's why I say it's not a very satisfactory process. It's too expensive, it's too burdensome, CRA does not have the resources to be able to do this properly. So what they've done is create an extremely complex system that's difficult to administer and to resolve disputes under." There has been one development that taxpayers in Canada can seize on as favorable over the past year and it played out in the courts. In Canada v. GlaxoSmithKline Inc., the Supreme Court of Canada weighed in on transfer pricing for the first time — and handed the Canada Revenue Agency a defeat in its battle with the giant pharmaceutical company. Most practitioners say the case is a game changer. 30 | LEXPERT • June 2013 | www.lexpert.ca B-00-Features.indd 30 13-05-17 9:35 AM