[Ip-health] How Multinational Corporations Avoid Paying Their Taxes

[Joana Ramos]

http://www.scoop.co.nz/stories/HL0611/S00390.htm


How Multinational Corporations Avoid Paying Taxes
Wednesday, 22 November 2006, 12:21 pm
Opinion: Peter Rost M.D.
How Multinational Corporations Avoid Paying Their Taxes

By Peter Rost, M.D.

excerpt:

> So what=92s going on here, how have multinational drug companies been
> able to gouge us for years selling expensive drugs and then avoid
> paying tax on their astronomical profits?
>
> The answer is simple. For companies in certain businesses, such as
> pharmaceuticals, it is very easy to simply =93invent=94 the price a
> company charges their U.S. business for buying the company=92s product
> which they manufacture in another country. And if they charge enough,
> poof; all the profit vanishes from the US, or Canada, or any other
> regular jurisdiction and end up in a corporate tax-haven. And that
> means American and Canadian tax payers don=92t get their fair share.
>


Drug companies and other multinational companies based in the U.S.
systematically avoid paying tax in the U.S. on their profits. The
companies elect to realize profits in low-tax countries and because of
this the rest of us have to pay billions of unnecessary taxes to make up
for the shortfall, writes Peter Rost, an ex-pharmaceutical executive.

The biggest tax scam on earth has a very innocent sounding name. It is
called =93transfer prices.=94 That almost sounds boring. It is, however,
anything but boring. Abuse of transfer prices is a key tool
multinational corporations use to fool the U.S. and other jurisdictions
to think that they have virtually no profit; hence, they shouldn=92t pay
any taxes.

Corporations involved in this scam are =93model corporate citizens,=94or so
they would like us to believe. The truth is that they rob us all blind.
The money we lose can be estimated in the tens of billions, or possibly
hundreds of billions of dollars every year. We all end up paying higher
taxes because rich corporations make sure they don=92t.

But don=92t take my word for this.

A few weeks ago U.K.-based GlaxoSmithKline (GSK), one of the largest
pharmaceutical companies in the world, together with the Internal
Revenue Service (IRS) announced that GSK will pay $3.4 billion to the
IRS to settle a transfer pricing dispute dating back 17 years. The IRS
alleges that GSK improperly shifted profits from their U.S. to the U.K.
entity.

And U.K. pharmaceutical companies are not alone with these kinds of
problems. Merck, one of the largest U.S. drug companies, also this month
disclosed that they face four separate tax disputes in the U.S. and
Canada with potential liabilities of $5.6 billion. Out of that amount,
Merck disclosed that the Canada Revenue Agency issued the company a
notice for $1.8 billion in back taxes and interest =93related to certain
inter-company pricing matters.=94 And according to the IRS, one of the
schemes Merck used to cheat American tax payers was by setting up a
subsidiary in tax-friendly Bermuda. Merck then quietly transferred
patents for several blockbuster drugs to the new subsidiary and then
paid the subsidiary for use of the patents. The arrangement in effect
allowed some of the profits to disappear into Merck=92s own =93Bermuda
triangle.=94

I have described many more ways the global drug industry cheats and
defrauds our government in my recent book, =93The Whistleblower,
Confessions of a Healthcare Hitman.=94 In this article, however, I=92m goin=
g
to focus on how they, and other rich multinationals, use the tax system
to defraud us.

So what=92s going on here, how have multinational drug companies been able
to gouge us for years selling expensive drugs and then avoid paying tax
on their astronomical profits?

The answer is simple. For companies in certain businesses, such as
pharmaceuticals, it is very easy to simply =93invent=94 the price a company
charges their U.S. business for buying the company=92s product which they
manufacture in another country. And if they charge enough, poof; all the
profit vanishes from the US, or Canada, or any other regular
jurisdiction and end up in a corporate tax-haven. And that means
American and Canadian tax payers don=92t get their fair share.

Many multinational corporations essentially have two sets of
bookkeeping. One set, with artificially inflated transfer prices is what
they use to prepare local tax returns, and show auditors in high-tax
jurisdictions, and another set of books, in which management can see the
true profit and lost statement, based on real cost of goods, are used
for the executives to determine the actual performance of their various
operations.

Of course, not every multinational industry can do this as easily as the
drug industry. It would be difficult to motivate $6,000 toilet seats.
But the drug industry, where real cost of goods to manufacture drugs is
usually around 5% of selling price, has a lot of room to artificially
increase that cost of goods to 50% or 75% of selling price. This money
is then accumulated in corporate tax-havens where the drugs are
manufactured, such as Puerto Rico and Ireland. Puerto Rico has for many
years attracted lots of pharmaceutical plants and Ireland is the new
destination for such facilities, not because of the skilled labor or the
beautiful scenery or the great beer=97but because of the low taxes.
Ireland has, in fact, one of the world=92s lowest corporate tax rates with
a maximum rate of 12.5 percent.

In Puerto Rico, over a quarter of the country=92s gross domestic product
already comes from pharmaceutical manufacturing. That shouldn=92t be
surprising. According to the U.S. Federal Tax Reform Act of 1976,
manufacturers are permitted to repatriate profits from Puerto Rico to
the U.S. free of U.S. federal taxes. And by the way, the Puerto Rico
withholding tax is only 10%.

Of course, no company should have to pay more tax than they are legally
obligated to, and they are entitled to locate to any low-tax
jurisdiction. The problem starts when they use fraudulent transfer
pricing and other tricks to artificially shift their income from the
U.S. to a tax-haven. According to current OECD guidelines transfer
prices should be based upon the arm=92s length principle =96 that means the
transfer price should be the same as if the two companies involved were
indeed two independents, not part of the same corporate structure.
Reality is that standard operating procedure for multinationals is to
consistently violate this rule. And why shouldn=92t they? After all, it
takes 17 years for them to pay up, per the GSK example above, even when
they get caught.

Another industry which successfully exploits overseas tax strategies to
cheat us all is the hi-tech industry. In fact, Microsoft Corp. recently
shaved at least $500 million from its annual tax bill using a similar
strategy to the one the drug industry has used for so many years.
Microsoft has set up a subsidiary in Ireland, called Round Island One
Ltd. This company pays more than $300 million in taxes to this small
island country with only 4 million inhabitants, and most of this comes
from licensing fees for copyrighted software, originally developed in
the U.S. Interesting thing is, at the same time, Round Island paid a
total of just under $17 million in taxes to about 20 other countries,
with more than 300 million people. The result of this was that
Microsoft's world-wide tax rate plunged to 26 percent in 2004, from 33
percent the year before. Almost half of the drop was due to =93foreign
earnings taxed at lower rates,=94 according to a Microsoft financial
filing. And this is how Microsoft has radically reduced its corporate
taxes in much of Europe and been able to shield billions of dollars from
U.S. taxation.

But remember, this is only one example. Most of the other tech companies
are doing the same thing. Google recently also set up an Irish operation
that the firm credited in a SEC filing with reducing its tax rate.

Here=92s how this is done in the software industry and any other industry
with valuable intellectual property. A company takes a great, patented,
American product and then develops a new generation. Then, of course,
the old product disappears. Some, or all, of the cost and development
work for the new product takes place in Ireland, or at least, so the
company claims. The ownership of the new generation product and all
income from licensing can then legally be shared between the U.S. parent
company and the offshore corporation or transferred outright to the
tax-haven. The deal, to pass IRS scrutiny, has to be made using the
=93arms-length principle.=94 Reality is that the IRS has no way of
controlling all these transactions.

Unfortunately those of us working and paying tax in the U.S. can=92t
relocate our jobs and our income to Ireland or another tax haven. So we
have to make up the income shortfall. In the U.S. we have a highly
educated society with a very qualified workforce, partly supported by
our tax payers. This helps us generate breakthrough products. But once a
company has a successful product, they have every incentive to move the
second generation of a successful product overseas, to Ireland and a few
other corporate tax havens.

There is only one problem for U.S. companies with this strategy, and
that is that if they repatriate this money to the U.S. they have to pay
full corporate taxes. In fact, according to BusinessWeek, U.S.
multinational corporations have built up profits of as much as $750
billion overseas, much of it in tax havens such as the Ireland, Bahamas,
and Singapore to avoid the stiff 35% levy they'd face if they
repatriated the funds back into the U.S.

But of course, Congress, which is basically paid for by our
multinational corporations, generously provided for a one-time provision
in the corporate tax code, so that they could repatriate profits earned
before 2003, and held in foreign subsidiaries, at an effective 5.25% tax
rate.

And so the game goes on.

In the end, multinational corporations live in a global world which
allows them to pretty much send their money to corporate tax havens at
will, and then repatriate this money almost tax free, with the help of
the U.S. Congress.

The people left holding the bag are you and me. If you want to know
learn more about the corruption in the drug industry, read my new book,
"The Whistleblower, Confessions of a Healthcare Hitman."

*************

Peter Rost, M.D., is a former Vice President of Pfizer. He became well
known in 2004 when he emerged as the first drug company executive to
speak out in favor of reimportation of drugs. He is the author of "The
Whistleblower, Confessions of a Healthcare Hitman." See:
http://the-whistleblower-by-peter-rost.blogspot.com/

--
Joana Ramos, MSW
Cancer Resources & Advocacy
7303 23rd Ave. NE
Seattle, WA  98115
206-229-2420
http://ramoslink.info/