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Pharmaceutical companies accused of profit shifting not being taken to court

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 Pharmaceutical companies accused of profit shifting not being taken to court

None of the pharmaceutical companies that are accused of profit shifting have been taken to court, the Australian Taxation Office has said in written responses to the Senate inquiry into corporate tax avoidance.

Earlier in July executives from the largest global pharmaceutical companies operating in Australia were hauled before the inquiry.

They were made to answer why, despite getting billions of dollars in subsidies from the federal government and making strong sales, on average they pay tax equivalent to just 1 per cent of their revenue. 

The inquiry heard nine firms – Johnson & Johnson, Pfizer, GSK, Merck Sharp Dohme, Eli Lilly, Novartis , AstraZeneca , Roche and Sanofi – had collectively paid a tax bill of only $85 million, despite more than $8 billion in sales.

They did this by using transfer pricing and making royalty payments to their overseas subsidiaries in places such as the Netherlands and Luxembourg.

Despite the high amount of profit being transferred out of Australia, none of these companies have been taken to court.

ATO settling more cases

In response to questions on notice given to Senate Economics and References Committee chairman Sam Dastyari, the ATO said there were no current disputes between the agency and taxpayers in the pharmaceutical industry in the Administrative Appeals Tribunal or Federal Court.

This did not mean that there might not be at some point in the future.

Tax Commissioner Chris Jordan has taken a particular focus on pharmaceutical and technology companies and vowed that the ATO would meet a budget target – set under the former Labor government – of bringing back $1.1 billion from multinationals by 2017

The ATO has already raised $250 million in liabilities through audits of multinationals, but the money counted so far is only the value of assessments raised, not money banked. Taxpayers might choose to dispute the assessments and take the agency to court.

The ATO's statistics show that when it comes to large business the agency is opting to settle more cases rather than litigate. In 2013-14 it settled $1.2 billion worth with 34 large companies, leaving it open to claims there might be a perception it is favouring the big end of town.

Tax Justice Network spokesman Mark Zirnsak said: "It is understandable that the Tax Office is not taking all these cases to court because there's danger that you might lose and then it's precedent. But the ATO needs to make sure it's not court shy. In some cases it would be better off taking them [big companies] to court rather than giving it all away."

ATO staff monitoring marketing hubs almost doubles

While litigation has dropped, the ATO is putting more resources into tracking multinationals, especially those that are shifting profit through marketing or service hubs in low-tax or no-tax nations.

Abbott government job cuts have reduced the total number staff at the ATO to 18,427 in April, down from more than 23,000 at the same time in 2014.

At June 2015 there were about 1200 staff members in the Public Groups and International team in charge of dealing with large companies, the ATO said.

It is estimated that 17.15 full-time equivalent of this number are working directly on marketing hubs issues, compared with 11 in 2014. It was a "priority area for the ATO", the agency said.

Pharma companies under the spotlight

Mr Jordan told the Senate inquiry at a hearing earlier in July that pharmaceutical companies tended to be the ones that "back the profit out through pricing or royalties".

"The fact is that this industry does invest a huge amount of money in the development of drugs, some of which go nowhere and some of which are highly profitable," Mr Jordan said. 

"The industry practice here has been to ensure that that type of function – the high-value-add function – is not part of any of the Australian operations."

That had created tension with the ATO, he said.

"It is an industry that we are constantly reviewing," he said, adding that the agency would be using tougher transfer pricing powers introduced under the former Labor government to go after them.

More companies wanting to deals 

In response to questions on notice, the ATO said over the past five years seven pharmaceutical companies had entered into a tax deal with the ATO, known in tax circles as an Advanced Pricing Agreement (APA).

It is a deal on how much tax is paid in future years. These agreements typically last for a period of three to four years, and are favoured by companies because it gives them certainty about the future taxes they pay.

The ATO said it had four in place now with the pharmaceutical players. One advanced pricing agreement was entered into in 2013 and three were existing advanced pricing agreements that had been renewed and not run out yet.

While more companies want to do deals, the ATO is being more picky about who it does deals with. Apple, which has had APAs in place with the ATO for a decade, said in its submission to the Senate inquiry that the ATO had refused its request recently. 

Fresh ATO figures show that  across all large businesses there were 148 APAs in 2014-15, down from 175 in 2013-14.

The number of APAs that have been renewed increased from 10 to 15 over the period. But the number of new APAs being negotiated has fallen from 25 to 16.

King & Wood Mallesons tax partner Jerome Tse said he did not envisage more litigation between the ATO and big companies, but profit-shifting transactions and the use of APA's would be scrutinised more closely.

Mr Jordan told the inquiry the ATO would be looking "through a different lens" at any APA requests made in future.

Read more: http://www.smh.com.au/business/the-economy/pharmaceutical-companies-accused-of-profit-shifting-not-being-taken-to-court-20150728-gillgg.html#ixzz3hEUtaDBr