The cost of tax avoidance

By Shahid Shah
October 18, 2018

International pharmaceutical companies are facing issues with regard to intellectual property rights in developed and developing countries, and local medicines that have proved to be dangerous for patients. At the same time, organisations working for the benefit of the people have questioned large multinational pharmaceuticals for charging higher prices and avoiding taxes.

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Oxfam has conducted research on four such large multinationals that have reportedly been avoiding taxes. It has looked into publicly available data on the subsidiaries of four of the largest US drug companies and found a pattern. In countries that have standard corporate tax rates, the pre-tax profits of corporations remain low. An Oxfam report issued in September 2018 states that in eight developed economies, drug company profits averaged seven percent. Meanwhile, they averaged at five percent in seven developing countries. And yet, these corporations reported annual global profits of approximately 30 percent. High profits were made in tax havens. In four countries that charge low or no corporate tax rates, these companies reported profit margins worth 31 percent.

The Oxfam report revealed that “while the information is far from complete, the pattern is consistent: this is either an astounding coincidence or the result of using accounting tricks to deliberately shift profits from where they are actually earned to tax havens.

“…All four were among the US corporations with the most money stashed overseas: at the end of 2016, these four companies alone held an astounding $352 billion offshore”. Drug companies are often believed to take advantage of the global ‘race to the bottom’ on taxation.

As per the report, Oxfam reached out to all of the companies named in its report and asked them to share the data they gathered, the methodology they employed, and the findings of their research. “We sent them our recommendations, and sought to engage them directly regarding responsible corporate tax practice,” the report issued by the non-profit organisation adds. “We reached out to the major pharmaceutical trade associations named in this report, as well. This report integrates the responses that we received. The corporations neither confirmed nor denied the specific research findings in this report”.

As per the September 2018 report, a dysfunctional international tax system allows multinationals to artificially shift profits away from where they sell their products to low-tax jurisdictions. Such companies are more than willing to take advantage of the broken tax system and invest millions in turning it in their favour.

The human papilloma virus (HPV) vaccine is a case in point. HPV is a sexually-transmitted infection that can cause cervical cancer. If the Oxfam report is anything to go by, HPV kills 300,000 people every year. Every two minutes, a life is lost to this disease and 90 percent of these deaths are women who belong to low- and middle-income countries.

There is a common perception that pharmaceutical profits are much lower in poorer countries as purchasing power is limited and drugs are believed to be sold at a discounted rates. But the statistics cited in the Oxfam report paint a different picture. In advanced economies with larger markets and stronger purchasing power, the profit margins of drug companies are just as slim as they are in the developing world. The report also suggests that corporations may have avoided even more in taxes in these larger markets. Nearly $3.7 billion annually, which is tantamount to two-thirds of the $5 billion they actually paid, has been avoided.

The pharmaceutical industry has the largest number of people working for a special interest in the US. The Oxfam report claims that this included 1,500 agents representing professional lobby firms in 2017 – equivalent to 13 percent of all lobbyists. A sizeable portion of the workforce comprises former members of Congress and former high-ranking federal employees, who use their experience in government and connections to advocate.

“Among drug companies, Pfizer is consistently a top lobby spender, ranking second in 2017 at $10.4 million,” the report says. “Johnson & Johnson ($6.9 million) and Merck ($6.2 million) ranked sixth and seventh, respectively, while Abbott ($4.2 million) ranked 13th.

“Between 2010 and 2016, the main trade association of these corporations, Pharmaceutical Researchers and Manufacturers of America (PhRMA), donated $1.8 million to candidates for Congress representing both major parties, double what the US Chamber of Commerce provided. But the bulk of contributions came from pharma companies and their political action committees (PACs). The four companies Oxfam studied donated a total of $43.9 million during those years: $17.6 million by Pfizer, $11.6 million by Abbott, $9.5 million by Merck, and $5.2 million by Johnson & Johnson”.

Most companies also engage in “clever grassroots campaigns”. According to the report, when a medicine is excluded from eligibility for government purchase because it is too costly, patients’ rights organisation, and not large companies, voice their reservations in the media. Interestingly, these organisations are often funded by corporations. “Twelve major pharmaceutical companies, including Abbott, Johnson & Johnson, Merck, and Pfizer, fund more than 65 such groups in Latin America, as well as their umbrella, the International Alliance of Patients’ Organisations,” the report states.

Tax avoidance, high prices, and influence-peddling serve to explain the profitability of these companies and the benefits they offer their wealthy shareholders and senior executives. As per the Oxfam report, the 25 largest drug companies in the US had “global annual average profit margins of between 15 [percent] and 20 percent in the period 2006-2015” while the figure for comparable non-drug companies was between four percent and nine percent. These high profits, in turn, increase the incentive that these corporations have to shift profits and avoid taxes.

Many companies have claimed that they need super profits so they can invest in initiatives to discover new medicines to cure various diseases. But isn’t true. If the September 2018 report is to be believed, large drug companies spend “more on whopping payouts to shareholders and executives than on research and development”. Between 2006 and 2015, they spent $341.4 billion out of their $1.8 trillion in revenue on stock buybacks and dividends, which is equivalent to 19 percent. They spent $259.4 billion on research and development (R&D). What’s more, R&D expenses are tax-deductible.

In recognition of the global nature of this crisis in access to medicines, the UN secretary-general set up the High-Level Panel on Access to Medicines. This forum issued a report containing important recommendations to guarantee access to medicines and facilitate innovation. Oxfam has called on governments and international health organisations to implement the panel’s recommendations.

Oxfam has recommended that these companies must pay their taxes in an open and transparent way rather than engage in elaborate schemes to hide their profits as company’s profitability depends on publicly-funded research, public-drug certification, public procurement, and public protection of intellectual property.

The Oxfam report suggests that governments must take more steps to reverse their race to the bottom on taxation, and take basic transparency measures that will prevent abuse at the hands of multinationals. They must also devise suitable processes to ensure that public spending meets the priorities of citizens.

The writer is a freelancecontributor.

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