Glaxo ruling benefits Big Pharma companies in Mississauga

A top court ruling that sides with GlaxoSmithKline in the British drug giant’s tax fight case with Ottawa is “happy news for Big Pharma,” including many multinationals that call Mississauga home, a tax law expert told YourMississaugaBiz.com.

“The decision upholds GSK’s aggressive, cross-border structure,” said Queen’s University professor Arthur Cockfield a few hours after the Supreme Court of Canada ruling. “And the decision lets Glaxo send some of its profits from Zantac to a Swiss affiliate to reduce taxes. So profits are sent to a country with no taxation.”

Earlier Thursday, the high court released a decision that Cockfield said will affect how foreign multinationals shift some of their profits out of Canada.

Mississauga is home to many foreign subsidiaries — from Microsoft Canada and Wal-Mart Stores, to Target, Kellogg’s, Hewlett-Packard, Boston Scientific and Abbott Labs.

The city’s drug and biotech cluster employs more than 25,000 people and is one of the local economy’s fastest-growing sectors.

The GlaxoSmithKline case was about so-called “transfer pricing” — what multinationals charge their Canadian units for goods they import from their corporate parents.

Critics say the companies often inflate such prices, reducing profits earned by their Canadian units and thereby paying lower corporate taxes here.

The court sided with the drug company’s interpretation of tax law, which says the prices that subsidiaries pay must be equal to the “reasonable” cost that an unrelated business would pay.

Canadian Department of National Revenue had challenged a licence agreement between Glaxo Canada and a related foreign company that charged between $1,512 and $1,651 a kilo for the active ingredient in the anti-ulcer drug Zantac.

The prices charged exceeded the $194 to $304 a kilo charged to Canadian generic pharmaceutical companies Apotex Inc. and Novopharm Inc. by unrelated suppliers.

At Glaxo’s Canadian division on Mississauga Road in the city’s north end, spokeswoman Anna Robinson said the subsidiary is happy with the top court ruling.

“We are pleased that the Supreme Court of Canada has agreed with the Federal Court of Appeal on the main appeal,” she said in an email. “As the case is still before the courts, we are not in a position to comment further.”

Cockfield said the ruling on “transfer pricing” will make it easier for foreign companies to dodge Canadian taxes.

“A large multinational firm may owe Canada amounts that exceed hundreds of millions in tax revenues so the stakes are huge for the Canadian government,” said Cockfield, who has written several books on transfer pricing.

“The Supreme Court decision, however, supported Glaxo’s argument that it did not owe more taxes to Canada and thus may make it easier for foreign companies to dodge Canadian tax liabilities in the future.”

While other drug companies could come up with similar tax-evasion strategies, Cockfield said they shouldn’t adopt the method in Canada just yet. “The Supreme Court sent the whole thing back to the Tax Court of Canada to figure out how much we should charge for transfer prices,” he said. “The ultimate outcome is uncertain because the matter was sent back to the Tax Court of Canada.”

There is also a chance the trial court might clamp down on Glaxo’s strategy. Cockfield suspects the case will never go to trial and the government will end up with a settlement agreement in a year or so.

Cockfield also noted that the United States government went after Glaxo for the same thing and the outcome was very different. In 2006, the company settled with the IRS and paid $3.4 billion, the largest settlement in U.S. history. “Glaxo didn’t get away with this south of the border, but here it mainly looks like they have,” Cockfield said. “But the story isn’t over yet.”

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