A European View on Transfer Pricing After Glaxo
30 November 2006
By Pim Fris and Sébastien Gonnet
Transfer pricing disputes rarely make the headlines in Europe. Therefore, the September 2006 announcement of a settlement between the GlaxoSmithKline Group (Glaxo) and the US Internal Revenue Service (IRS) -- under which Glaxo must pay the IRS a record-setting $3.1 billion in taxes relating to transfer pricing adjustments -- has created a significant stir among transfer pricing practitioners throughout the world. In this article from Tax Planning International, Paris-based NERA Special Consultant Pim Fris and Senior Consultant Sébastien Gonnet provide the facts and circumstances of the case and share their preliminary conclusions about how the landmark outcome will affect the practice of transfer pricing worldwide.
Among the authors' conclusions is that the Glaxo case demonstrates on a large scale that differences of perception and interpretation of what creates value within a group can lead to severe conflicts between the taxpayer and the tax administration. The authors also note that the recognition and allocation of profit to the marketing function within a group remains one of the major transfer pricing challenges that multinational enterprises must face. Furthermore, the case demonstrates the need for innovative approaches to transfer pricing -- in terms of both transaction characterization and economic analysis -- that enable the development of transfer pricing solutions based on a more appropriate interpretation of "arm's length" than is typically applied.
