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UK: Pharmaceutical Firms May Be US Cash Cow

The Guardian
January 8th, 2004

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.





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