A Turkeys Pharma Company carried out drug production, import and sales operations, and had purchased different active ingredients from foreign group companies. Following an audit the tax office found that the prices paid by the Pharma Company for six ingredients had been above the market price resulting in a hidden distribution of profits. A price study was performed for similar active ingredients suggesting price deviations ranging from 167 – 975 % Table 2: Price deviation from market price Theophylline 167.26%ibuprofen 478.34%Fluoxetine 975.15%Hyoscine-N-Butilbrüm 150.13%Povidone Iodine 176.83%metamizolesodi 260.05% An assessment was issued where the cost of the ingredients – and thus taxable income of the Pharma company – was adjusted based on the price paid for similar active ingredients between unrelated parties. The Pharma Company disagreed with the assessment and brought the case before the tax court. The Tax Court issued a decision in favor of the Pharma company. In a study from the Turkish Pharmaceutical Association it was stated that active ingredients could have different prices due to reasons such as using original methods, impurities, crystal structure and polymorphism, mesh size, batch size, certificate differences etc. Based on this study the Tax Court found, that although it had been determined that the Pharma Company had purchased active ingredients at higher prices compared to other companies, there was no clear information about the characteristics of the active substance, production factors, or other factors that will cause price differentiation. This decision was appealed by the tax authorities. The Court of Appeal approved of the decision issued by the tax court and dismissed the appeal. Click here for translation ...

Fulford India Ltd. imported active pharmaceutical ingredients (APIs) from related group companies and sold them in India. The TNM method was used for determening transfer prices. The tax administration found the CUP method to be the most appropriate. Fulford India argued that the CUP method requires stringent comparability and any differences which could materially affect the price in the open market should be taken into consideration. In the pharmaceutical world, APIs whith similar properties may still be different in relation to quality, efficiancy, impurities etc. Therefore, the two products cannot be compared. In court, it was further explained that Fulford also performed secondary manufacturing functions, converting the APIs into formulations. Hence, Fulford could be descriped as a value added distributor. The Court concluded that the selection of the best method should be based on functional analysis and the characterisation of the transactions and the entities. The fact that Fulford had secondary manufacturing activities had not previously been explained to the tax authorities. Accordingly, the case was returned to tax administration for a revised assessment ...

A Korean pharma corporation produced and sold finished pharmaceuticals. Active ingredients were imported from foreign related parties in the United States and Ireland. The Korean pharma corporation produced and sold the original finished products by importing the five original patented raw materials that had expired from the patent period in each business period from December 1, 2001 to November 30. The tax authorities calculated the normal price of the original raw materials by a comparable third party pricing method. As for the specific methodology, the median price of imported generic raw materials for other domestic pharmaceutical companies was calculated by multiplying the ratio between the original product and the medical insurance price of the drug (generic finished product) produced by the domestic generic raw material by other domestic pharmaceutical companies. After calculating the normal price of the raw materials, the difference between the original price of the original raw materials and the difference between the original price and the normal price of the raw materials was included in the income. The tax authorities filed a law suit against the company for the disposition of a corporate tax levy, which had the following points:there are significant differences between generic drugs (or their raw materials) and original drugs (or their raw materials) in terms of customer loyalty,was not a market price reflecting the difference in quality but a government regulation price, which is an indicator of finished products, andwas not correlated with the import price of raw materials, so it was pointed out that it was inappropriate as an index to adjust for significant difference. Judgement of the Supreme Court “Generic raw materials in this case have the same composition and molecular structure as the original raw materials of the case and their efficacy, ie biological efficacy, do not seem to be much different, so the rest of the generic raw materials It would be possible to derive reasonable normal prices through such adjustments to the import prices of generic raw materials in this case. The medical insurance drug price does not include the consideration of the market value of the drug and its raw materials in the decision process, and furthermore, it is not considered whether the raw material of the drug is original or generic. And the upper limit is also determined by the number of items listed on the same ingredient formulation and the upper limit of the listed ingredients. Therefore, the price of the original finished product in the case of the health insurance drug price and the price of the generic drug It is hard to say that the adjustment method that utilizes the difference between drug prices can not be a way to rationally eliminate differences in consumer loyalty etc. that have a significant impact on the import price of generic raw materials in this case.” The Supreme Court concluded that if the original drug (or raw material) and generic drug (or raw material) are different in terms of customer loyalty, sales method and cost structure, and if the difference can be reasonably adjusted, it was possible to derive a reasonable normal price. The problem was whether rational adjustments could be applied to take into account the difference in price between the original drug and the generic drugThe Supreme Court held that such an adjustment could not be made, at that the assessment issued by the tax authorities was illegal. Click here for English translation ...