A transfer pricing case involving GlaxoSmithKline (GSK) and the Canadian authorities has been settled.

The pharmaceutical organisation had been called to legal proceedings in 2012 due to its Canadian subsidiary agreeing to purchase an ingredient contained in the drug Zantac from its Swiss subsidiary for a cost of between C$1,512 and C$1,651 (£792 to £864) per kilogram.

Generic alternatives to Zantac were available for significantly lower prices at the time, which led the Canada Revenue Agency to rule the Canadian subsidiary's payments to its Swiss counterpart were not reasonable.

An initial trial rejected GSK's defence that a licence agreement existed between the parent company and its subsidiaries. However, this was overturned by the Federal Court of Appeal - a decision that was then upheld by the Supreme Court of Canada.

Claire Kennedy, a tax partner in Bennett Jones LLP’s Toronto office, told the Financial Post: "What is important is the Supreme Court’s acknowledgement that transfer pricing decisions don’t exist in a vacuum and don’t operate outside business realities."

"Here, the circumstances did not arise out of the non-arm’s length relationship between Glaxo [the Canadian subsidiary] and the Glaxo group, but from the business realities imposed by the market power of the product," she added.

According to the newspaper, the Supreme Court recognised that transfer pricing is not an exact science and that some degree of flexibility can be applied when determining whether an allocation is reasonable or not. This is an outcome that legal observers have interpreted as a victory for taxpayers.

A second trial had been scheduled to start next week, but will no longer be required due to a settlement being reached. Full details of the agreement have not yet been released, William Innes of law firm Rueter Scargall reported.