Perrigo Company and Subsidiaries is a multinational pharmaceutical group headquartered in the United States, primarily engaged in distributing generic over-the-counter drugs. Beginning in the late 1990s, Perrigo expanded internationally with the assistance of Ernst & Young under a tax-efficient supply chain management (TESCM) plan. As part of this restructuring, Perrigo’s domestic subsidiary L. Perrigo Company assigned a Supply & Distribution Agreement with Dexcel Pharma (relating to a generic omeprazole product) to an Israeli affiliate, Perrigo Israel Trading Limited Partnership and LLC (PITLP/LLC). The LLC had no operational employees or separate operations but assumed the contractual rights, risks and profit potential under the Dexcel agreement. After successful FDA approval and patent litigation settlement, the omeprazole product was launched in the U.S. market in early 2008 and generated approximately $977 million in net sales during the tax years 2009–2012. PITLP/LLC paid L. Perrigo Company for the assignment via a demand note at what Perrigo considered an arm’s length price.
The IRS issued Notices of Deficiency for the 2009–2012 tax years, reallocating omeprazole income from the Israeli affiliate to Perrigo’s domestic entities under three common-law sham doctrines (economic substance, sham transaction, and substance over form), arguing the assignment lacked economic substance. Alternatively, the IRS reallocated nearly all omeprazole income under Section 482 of the Internal Revenue Code, contending the transfer price was not at arm’s length. Perrigo paid approximately $143 million in tax, penalties, and interest and filed claims for refund, which were disallowed. A separate issue concerned whether costs incurred in preparing ANDA Paragraph IV patent certifications should be deducted as ordinary business expenses or capitalised.
Perrigo argued the assignment had genuine business purpose beyond tax reduction, that the Israeli affiliate assumed meaningful risk at the time of the transfer when FDA approval and patent litigation outcomes were uncertain, and that the arm’s length price should be evaluated using contemporaneous projections rather than later actual outcomes. Perrigo’s expert employed a discounted cash flow (DCF) valuation method based on ex ante expectations.
Judgment
The Court ruled largely in favour of Perrigo.
It rejected the Government’s common-law sham doctrines, finding the assignment of the Dexcel agreement had sufficient economic substance and should be respected. On the Section 482 analysis, the Court determined that the DCF analysis prepared by Perrigo’s expert, subject to certain refinements regarding cost assumptions and discount rate, captured the arm’s length transfer price. The Court specifically rejected the use of hindsight (actual outcomes) in determining the arm’s length price, holding that the analysis must be based on what was reasonably known or foreseeable at the time of the transaction. The Court further rejected penalties as inappropriate. On the ANDA issue, the Court concluded that costs of preparing Paragraph IV patent certifications must be capitalised, but allowed the deduction of actual patent litigation defence costs. The final judgment determined that Perrigo had overpaid federal income tax, interest, and penalties totalling approximately $89 million across the four fiscal years, and ordered refunds with statutory interest.
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