Classic Transfer Pricing Case: Smithkline Beecham Animal Health Inc. v. Canada, 2002 FCA 229By Robert Robillard - 1 December 2014
This blogpost originally appeared on rbrt.ca.
In Smithkline Beecham Animal Health Inc. v. Canada, 2002 FCA 229 (CanLII), a Canadian tax court accepts the relevance of the OECD Transfer Pricing Guidelines for Canadian transfer pricing purposes for the first time. The Federal Court of Appeal wrote:
“ To explain the significance of these pleadings, both parties rely on the 1979 OECD Guidelines (Transfer Pricing and Multinational Enterprises: Report of the OECD Committee on Fiscal Affairs (Paris: Organization for Economic Co-operation and Development, 1979); there is at least one later edition of the OECD Guidelines, but in terms of the broad propositions to be considered in this case, the differences between the editions may be disregarded.) The OECD Guidelines are referred to in Information Circular 87-2, International Transfer Pricing and Other International Transactions, dated February 2, 1987, which is intended to advise taxpayers about international pricing issues. Information Circular 87-2 was cancelled on September 27, 1999 and replaced by Information Circular 87-2R, International Transfer Pricing, which also refers to the OECD Guidelines.  It appears to be common ground that the OECD Guidelines inform or should inform the interpretation and application of subsection 69(2) of the Income Tax Act. The OECD Guidelines state the principles for determining international transfer prices and, where possible, the agreement among OECD members with respect to the practices to be followed. According to the OECD Guidelines, there are a number of methods for determining an arm’s length price in the context of international transactions. The method that is said to be in principle the most appropriate and in theory the easiest is the comparable uncontrolled price method, or “CUP” method. In general, the CUP method requires a direct reference to prices in comparable transactions between enterprises that are independent of each other.  The OECD Guidelines also describe a number of other pricing methods that could be used in situations where the CUP method cannot be used. For example, the CUP method cannot be used if reliable information as to comparability cannot be obtained, or the available comparisons result in too many unquantifiable differences.”
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