GlaxoSmithKline has won a lengthy court battle in Canada in which it was accused of paying a related company inflated prices for pharmaceutical ingredients in order to avoid paying taxes in the country.

The Canadian government took issue with the fact that Glaxo Canada purchased ranitidine - the active ingredient in the antiulcerant Zantac - from a Swiss group related to its parent company for more than $1,500 a kilogram during 1990 and 1993, when two of its rivals, Apotex and Novopharm, paid just $194-$304 per kg from 'arm's-length suppliers'.

It argued that the payments to the affiliate had been artificially inflated so that Glaxo Canada could underreport its income - allegedly to the tune of $51 million over the period - and thus pay less tax.

However, the company reportedly argued that just comparing the prices paid between competitors was not a just analysis, particularly when licensing agreements - which may stipulate from whom ingredients are purchased, for example - are involved.

The Supreme Court in Canada agreed, ruling that a new method - that takes into account all the factors involved in determining what company subsidiaries charge each other, known as transfer pricing - should be employed.

"If transactions other than the purchasing transaction are relevant in determining this question, they must not be ignored," the Court concluded.

Back to Tax Court

It referred GSK's case back to the Canadian Tax Court, so it can reassess the group's tax over the period taking all circumstances into account. 

However, the move has sparked local concern that multinational corporations will now find it easier to avoid taxes in Canada by directing their profits elsewhere.

Art Cockfield, a tax law professor at Queen’s University in Kingston, told Canada's Financial Post that "the decision in part upholds aggressive international tax plans by multinationals that involve companies that are related to their Canadian companies".