The arm's-length principle that should apply to transfer pricing is difficult to implement in practice, says John Tobin in Law Times

Glaxo Case Sets Principle for Dealing With Transfer Pricing

September 27, 2010

Transfer pricing issues emanate from multinationals' placing as much of their profits as possible within lower-tax jurisdictions.

In an increasing number of countries, to ensure fair allocation of revenues and expenses in cross-border intra-corporate transactions, authorities require taxpayers within the same group to ensure that any transfer of goods, services, intangibles or financing arrangements between them occurs on the same terms as those that independent parties would negotiate.

This is known as the arm’s-length principle.

Implementation of this principle is not easy. This is particularly true in Canada, where the statutory guidance found in s. 247 of the Income Tax Act is sketchy, and the interpretive jurisprudence is embryonic, despite the fact that it has been in force since 1998.

Fortunately, decisions are beginning to emerge, with the most significant of late being the Federal Court of Appeal's July 26 ruling in GlaxoSmithKline Inc. v. Canada. The trial judge still faces the difficult task of establishing an appropriate transfer price without guidance from the appeal court on how to deal with the fact that the total price paid by the Canadian subsidiary had two components: the price for the ranitidine paid to Adechsa and the 6% royalty paid to Glaxo Group.

"There is unlikely to be a comparable in which an arm's-length party has the rights at a specific level of royalty to market a given product and then buy the raw material from a third party," says John Tobin.

Read the full article here.


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