Two big disputes – Vodafone and Glaxo – in the news

Despite some of the headlines, Glaxo hasn’t won its transfer pricing court case in Canada. The judgement is worth reading: it’s not too technical and sets out the issues well. See also Alison Christians’ summary of the issues.

The substance of the dispute is over which of the OECD-prescribed transfer pricing methods is appropriate for the importing of branded drugs. Alison thinks that it’s not appropriate to wrap up a license agreement (because this is a branded drug) and a simple supply contract in the same deal, and hence the revenue is right that the ‘arm’s length price’ would be that paid by generic drug companies. Aside from the substance, there are a couple of interesting issues:

1. The transactions under discussion happened 20 years ago. The legal process has dragged on rather excessively, with a tax court overruled by the supreme court, which itself took nine months to reach a verdict. It’s hard to imagine smaller developing countries having either the institutional capacity within the revenue authority, or the judicial capacity to handle it within their court systems, to fight legal disputes of this length.

2. The legal point about who ‘won’ is significant. Canadian law places the burden of proof on Glaxo to “‘demolish’ the exact assumptions made by the Minister [ie the tax authority] but no more.” In general, the company doesn’t have to defend its own position, only to pick apart the tax authority’s exact argument. Nevertheless, the judge’s finding is that, while Glaxo successfully demolished the government’s proposed method (specifically, its choice of comparable arm’s length transactions), it did not demolish the government’s case that Glaxo’s original method was unreasonable. So the case is not over yet!

Meanwhile in India

It looks like the government might be preparing to row back on its plan to introduce a law that retrospectively rules Hutchinson and Vodafone’s billion dollar tax dodge illegal, according to the Economic Times.

A committee asked by the government to investigate the proposal has recommended that the law that would prevent this particular dodge, under which Hutchinson avoided capital gains tax on the sale of its Indian subsidiary to Vodafone by structuring the transaction through a tax haven, not apply retrospectively. If it does apply to transactions that have already taken place, the committee argues that interest on unpaid tax and fines levied by the tax authority should be waived.

This case is a textbook example of tax avoidance: the companies found a watertight loophole (if that’s not a tautology) and, while they’ve earned some criticism for doing so, ultimately it does not seem fair to fine them for behaving in a legally compliant, if controversial, manner. Change the law, claim back the tax, and leave it at that.