Canada's Federal Court of Appeal Offers Some Guidance on Transfer Pricing Issues

Surveys of tax and finance directors of multinational companies show that transfer pricing is their greatest concern. Governments share the concern: More than 50 countries have some form of transfer pricing legislation. And American tax authorities estimate that the U.S. is losing at least US$28 billion annually in potential transfer pricing revenues.

Transfer pricing issues emanate from this simple truth: Multinationals are prone to tax planning that attempts to place as much of their profits as possible within lower-tax jurisdictions. One way of achieving this is through the allocation of revenue and expenses in intracompany transactions. A subsidiary in a high-tax jurisdiction, therefore, may minimize the prices it charges for goods supplied or services rendered to a sister company in a lower-tax jurisdiction. The reduced profits in the higher-tax jurisdiction and increased profits in the lower-tax jurisdiction translate into a better after-tax bottom line for the enterprise as a whole.

The trial judge refused to consider the license agreement because the two agreements covered separate matters. He ruled that the reasonable price for Glaxo to pay was the highest price paid by the generics, subject to a small adjustment.

Relevant Circumstances


Julius Melnitzer

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