(i) USpharm, a U.S. pharmaceutical company, develops a new drug Z that is a safe and effective treatment for the disease zeezee. USpharm has obtained patents covering drug Z in the United States and in various foreign countries. USpharm has also obtained the regulatory authorizations necessary to market drug Z in the United States and in foreign countries. (ii) USpharm licenses its subsidiary in country X, Xpharm, to produce and sell drug Z in country X. At the same time, it licenses an unrelated company, Ydrug, to produce and sell drug Z in country Y, a neighboring country. Prior to licensing the drug, USpharm had obtained patent protection and regulatory approvals in both countries and both countries provide similar protection for intellectual property rights. Country X and country Y are similar countries in terms of population, per capita income and the incidence of disease zeezee. Consequently, drug Z is expected to sell in similar quantities and at similar prices in both countries. In addition, costs of producing and marketing drug Z in each country are expected to be approximately the same. (iii) USpharm and Xpharm establish terms for the license of drug Z that are identical in every material respect, including royalty rate, to the terms established between USpharm and Ydrug. In this case the district director determines that the royalty rate established in the Ydrug license agreement is a reliable measure of the arm’s length royalty rate for the Xpharm license agreement ...

Intervet Productions SRL, a company resident in Italy, manufactures veterinary medicines and supplements. The Italian tax authorities issued a notice of assessment, relating to the 2004 tax year. In that notice, the tax authorities ascertained the inconsistency of the transfer prices concerning the sale of certain goods to a related party in Germany. For the determination of the transfer prices, the taxpayer had used two methods: the resale price method, for products subject to mere marketing, and the cost-plus method, for products subject to further processing by Intervet. The tax authorities had used the CUP method for the purpose of the adjustment. Intervet appealed against the assessment, contesting the comparability of the products compared by the tax authorities but lost in the proceedings on the merits An appeal was then filed with the Supreme Administrative Court. Judgement of the Supreme Administrative Court The Court set aside the assessment. The Court stated that the tax authorities has to prove that the transactions, put in place by the taxpayer, would have generated greater taxable income if they had been conducted between third and independent parties, pursuant to Article 9(3) of the TUIR. In identifying the methods for determining transfer prices, the tax authorities must follow the indications contained in the OECD Transfer Pricing Guidelines and choose the method that is most appropriate in relation to the concrete case. The Court notes that in the judgment under appeal the functional analysis relating to the competing company was completely disregarded, since no assessment was made of the comparability and economic function performed by the latter. It is also noted that no reasons were given as to why the method applied by the taxpayer should be considered inadequate compared to the price comparison method applied by the Agency. Excerpts “…..” Click here for English translation Click here for other translation ...

Perrigo has lost is request for overturning a €1.64 billion tax assessment in a judicial review by the Irish High Court. The contention of the Irish Revenue is that a transaction (involving the disposal of intellectual property rights) which has been treated as part of the trade of Perrigo in its corporation tax returns should properly have been treated as a capital transaction. When treated as a capital transaction an effective tax rate of 33% is applied rather than the usual 12.5% rate. The Irish Revenue’s qualification of the transfer in question as an capital transaction results in additional taxes in the amount of €1,636,047,645. The transaction involved the sale to Biogen, in 2013, of Perrigo’s remaining 50% interest in the intellectual property relating to a pharmaceutical product sold under the brand name Tysabri which is used to treat multiple sclerosis and Crohn’s disease. “Perrigo explains that from 1st January, 2000, EPIL [Elan Pharma International Ltd] began to fund the continued development of Tysabri. It sought to find a collaboration partner with the necessary technical capability knowledge and experience in the area of multiple sclerosis research and development. Biogen was chosen as the counterparty as it satisfied both of those requirements. EPIL first disposed of 50% of its interest in the IP relating to Tysabri to Biogen in 2000 and received an upfront payment of US$15 million as reimbursement of research and development expenditure incurred to that date together with milestone payments if certain triggering events in the development process occurred. At the time of this partial disposal, Tysabri had not undergone the full clinical trials process and required “hundreds of millions of dollars of additional research and development investment with absolutely no guarantee of success”. Perrigo maintains that all income associated with the 2000 disposal was at the time treated and returned for corporation tax purposes as part of trading income and no issue was raised by the inspector or by the Revenue. Between 2004 and 2006, Tysabri was launched on the United States market, withdrawn from the market and subsequently relaunched. EPIL continued to actively manage the IP asset (representing the remaining 50% interest in the patents and the other IP relating to Tysabri) remaining in its portfolio. This was principally done through the detailed governance arrangements in the Collaboration Agreement with Biogen. It involved (inter alia) trying to establish the efficacy of the drug for the treatment of other diseases (such as Crohn’s disease) and attempting to secure licences for its release in jurisdictions outside the United States.” “Throughout this period of collaboration, EPIL did not manufacture Tysabri. Instead it was manufactured by Biogen. In April, 2013, the remaining 50% interest in the Tysabri IP was sold to Biogen with the consideration paid in the form of an upfront payment together with future contingent payments. The upfront payment received from Biogen in 2013 was included in the trading income in the EPIL tax return filed with Revenue in September, 2014 for the 2013 period. Perrigo complains that it was not until 30th October, 2018, not long before the expiry of the applicable four-year statutory limitation period, that the Revenue issued the audit findings letter in which the contention was made, for the first time, that the disposal of IP did not constitute part of EPIL’s trade.” Perrigo contends that the Revenue is incorrect in characterising the sale of the intellectual property (“the Tysabri IP”) as a capital transaction and has appealed the notice of amended assessment to the Tax Appeal Commission (“the TAC”). In the event that the present application for judicial review fails, it will be for the TAC to determine whether the disposal of the Tysabri IP was or was not a trading transaction. In the proceedings before the court, Perrigo claims that the appeal should never have to proceed before the TAC. Perrigo claims that, irrespective of the nature of the transaction, there was no legal entitlement on the part of the inspector to issue the assessment. Perrigo has instituted these judicial review proceedings challenging the legality of the notice of amended assessment on the grounds that the assessment is (a) in breach of Perrigo’s legitimate expectations; (b) so unfair as to amount to an abuse of power; and (c) that it amounts to an unjust attack on its constitutionally protected property rights. The conclusion of the Irish High Court “Perrigo has failed to establish that there is anything in the course of dealing between the parties which would make it unfair in the present case for the Revenue to exercise its statutory powers under the 1997 Act to issue an amended assessment.” “Perrigo has failed to establish a basis for either the legitimate expectation or the abuse of power/unfairness claims, it seems to me that its argument based on the Constitution must also fail.” “Perrigo has failed to establish any basis to interfere with the assessment issued in respect of the disposal of the Tysabri IP and, accordingly, its claim must be dismissed. Whether the disposal of the Tysabri IP constituted a trading or a capital transaction will now have to be resolved before the Tax Appeals Commissioner, and according to the High Court there are clearly arguments available as to why the disposal of the Tysabri IP should be regarded as a capital transaction ...

In September 2006 the Internal Revenue Service announced that it has successfully resolved a transfer pricing dispute with Glaxo SmithKline. Under the settlement agreement, GSK will pay the Internal Revenue Service approximately $3.4 billion, and will abandon its claim seeking a refund of $1.8 billion in overpaid income taxes, as part of an agreement to resolve the parties’ long-running  transfer pricing dispute for the tax years 1989 through 2005. See also the GlaxoSmithKlein decision from july 2001 The IRS announcement ...