UK: Pharmaceutical Firms May Be US Cash Cow

Publisher Name: 
The Guardian

To ordinary mortals facing 100 instant fines if they
don't file their
self-assessment forms by the end of the month, it
seems absurd that
GlaxoSmithKline can still be arguing with the American
tax authorities
about its liability for the years 1989 to 1996. Almost
as absurd as the
size of the demand itself - $5.2bn, with accumulated
interest.

But in the wonderful world of pharmaceuticals, lateral
thinking is prized
as highly in tax planning as in the lab. The point
about drugs is that
once you have researched and developed them, they are
cheap to make. The
rule of thumb is that for every $100 of sales, only $5
should be spent on
manufacturing.

The trick is to make them in places with low tax
regimes and retain as
much of the profit there as possible. Puerto Rico is a
current favourite
and so is Ireland, where nine of the world's top 10
have facilities.

In other words, everybody does it, which is why it is
odd that the US tax
authorities seem to be pursuing GSK with such vigour.
It is hard to
believe that the company's internal transfer pricing
systems are wildly
different from its rivals' - after all, its profit
margins are not out of
line.

The most plausible explanation is that Glaxo is simply
being targeted
because it was a pioneer of manufacturing in low tax
countries. It and
Wellcome, which Glaxo bought in 1995, were among the
first to invest in
Singapore. Ulcer pill Zantac, in the days when it was
the world's
top-selling drug, was produced there. The view of
America's internal
revenue service may be "win the Glaxo case and the
rest will follow".

Glaxo can, of course, afford $5.2bn if the worst
happens; it would be 60%
of its free cashflow in 2006, according to one
analyst. The more worrying
idea is that the IRS's pursuit reflects a hardening
attitude towards drug
firms in Washington, which has good reason to fret
about rising health
care costs. The politicians may feel higher taxation
of pharmaceutical
firms looks like an easy ambition, not to mention a
vote winner.

AMP Section Name:Pharmaceuticals