OTTAWA — CRA found some revenues for the U.S. pharmaceutical giant behind diabetes and weight-loss medication Mounjaro lower than expected and suspects the company didn’t pay enough taxes in 2020, National Post has learned.

New Federal Court filings reveal that the Canada Revenue Agency (CRA) launched an audit of pharmaceutical company Eli Lilly’s Canadian arm in 2024 after noting that the firm’s 2020 profit margins appeared suspiciously below the norm.

“The Agency determined that Lilly Canada acquired all its inventory from related offshore entities with the bulk of the inventory coming from Ireland, a low tax jurisdiction,” reads the CRA’s lawsuit filed July 31.

“It further determined that Lilly Canada’s profit margins were below the margins typically earned by independent entities involved in the marketing, promotion, and distribution of pharmaceutical products, signaling potential transfer pricing issues.”

The lawsuit is the first public revelation of CRA’s ongoing audit of the U.S.-based pharmaceutical giant behind major diabetes medications such as GLP-1 Mounjaro as well as Prozac and Cialis. Eli Lilly is considered the most valuable pharmaceutical company in the world.

The CRA’s audit is still ongoing and there has not been any public finding of wrongdoing against Lilly Canada. But the process could lead to a battle over millions of dollars in taxes over how the company and CRA interpret transfer payment obligations.

“Lilly Canada disagrees with the characterizations in the Canada Revenue Agency’s application and we will respond formally through the Court process in due course. We are confident in our position and remain committed to working constructively with the Canada Revenue Agency to resolve the matter,” company spokesperson Ethan Pigott said in a statement.

The CRA and Lilly Canada are locking horns very early in the audit. The CRA’s lawsuit is asking the Federal Court to oblige the pharmaceutical giant to fork over certain documents it has so far refused to disclose as part of the tax agency’s verification.

The lawsuit reveals that the tax agency is interested in transactions of monies and certain goods and services between Eli Lilly’s Canadian and Irish arms as part of what is called transfer pricing.

In particular, the tax agency is looking into the company’s transactions pertaining to distribution and marketing activities, clinical research and development services and other “support services” for the company’s other foreign entities.

Transfer pricing rules in Canada state that a Canada-based company selling or purchasing goods and services from one of its foreign divisions must price those transactions appropriately to “ensure the appropriate amount of profit is reported in Canada.”

The rules aim to prevent a company from selling itself products at artificially low prices to pay fewer taxes, for example.

In a sector like pharmaceuticals where most large companies are multinationals, transfer pricing is a huge part of tax filings and business considerations, said Matthew Wall, an accountant and preeminent Canadian specialist in transfer pricing.

He said it wasn’t surprising that CRA was looking into Lilly Canada’s transfer pricing accounting, as the company likely declares hundreds of millions of dollars of such transactions yearly in Canada. That makes them “target number one” for CRA.

“So, a small error would have a big impact on the on the Canadian profits and taxes,” he told National Post.

What’s unique about this case is the length of the audit, said Wall, who is frequently called upon as an expert witness of transfer pricing in court.

Normally, these audits last up to two years. In this case, the audit is two years old and seems far from complete, Wall noted.

“This is a high-stakes game,” he said.

The CRA declined to comment, citing the ongoing legal case.

National Post

cnardi@postmedia.com

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