Canada vs. McKesson. October 2012. Tax Court

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McKesson is a multinational group involved in wholesale distribution of pharmaceuticals. Its Canadian subsidiary entered into a receivables sales (factoring) agreement with its direct parent, McKesson International Holdings III Sarl in Luxembourg in 2002. Under the agreement, McKesson International Holdings III Sarl agreed to purchase the receivables for about C$460 million and committed to purchasing all the eligible receivables as they arose for the next five years. The price of the receivables was determined at a discount of 2.206 percent from the face amount. The funding to buy the receivables was borrowed in Canadian dollars from an indirect parent company of McKesson International Holdings III Sarl in Ireland and guaranteed by another indirect parent in Luxembourg.

The Court didn’t recharacterize the transactions. The Court emphasized that the Canadian Income Tax Act was the only legally binding clause on appeal before the court and that the practice of the CRA under the OECD guidelines was irrelevant. This case recognizes the need to consider other factors (for example, a series of transactions, like the source of funding and the guarantee) that resulted from non-arm’s-length relationships in analyzing the transaction.

The Tax Court of Canada rejected McKesson’s appeal of a transfer pricing adjustment related to the sale of accounts receivable to its foreign parent.  The Tax Court found that the the subject transaction was “more of a tax avoidance plan than a structured finance product.”