Anglo-Swedish drugs company AstraZeneca has agreed to pay HM Revenue £505 million to settle a long-running dispute over ‘transfer pricing’ and other unspecified UK tax matters.
What is transfer pricing?
The highly contentious practice of transfer pricing allows a company to reduce its tax liability in a higher tax country by transferring intangible property – such as patents, trademarks and licences – to a subsidiary in an offshore, lower tax country.
The developed world has sought to clamp down on the practice of late as part of an international crusade against tax avoidance.
In 2004 US tax authorities named AstraZeneca as one of 30 companies involved in a tax avoidance scheme sold by accountancy firm KPMG which resulted in “almost £1 billion in lost revenue”. But AstraZeneca denied any wrongdoing: “We draw a distinction between tax planning using artificial structures and optimising tax treatment of business transactions, and we only engage in the latter.”
The Guardian says the settlement with British tax authorities, however, “could have far-reaching implications for other UK multinationals.”
In a recent report, Pharma 2020: Taxing Times Ahead, accountancy firm PricewaterhouseCoopers warned pharmaceutical companies face higher tax liability in the years ahead as governments crack down on avoidance to meet rising public sector deficits. “For the past 20 years, pharma has benefited from a benign legislative and commercial environment that has enabled it to report low and stable tax rates. These elements are changing.” The report also highlights wide differences in the corporation tax rates paid by drugs manufacturers. In 2008, for example, Bayer paid German corporation tax at 29.3%; while Novartis only paid 14% in Switzerland.
Of course, transfer pricing is not limited merely to pharmaceutical companies. Last year, the Guardian revealed Google used a cross-border network of subsidiary companies to avoid paying any corporation tax on its £1.6 billion advertising revenues in Britain.
Richard Murphy of the Tax Justice Network has campaigned for multinationals to undertake country-by-country reporting to increase transparency and curtail tax evasion. He says transfer pricing costs the developing world at least £100 billion in lost revenues.
And he had this to say about Google’s tax arrangements:
“If tax paid is a measure of corporate social responsibility to the communities from which a company generates its income – and in Google’s case it generates more than 15% of its total revenue from the UK – then it is not acting in a responsible fashion in this country where its activities are having significant social consequence. I think that wrong.”
** Additional info & advice on UK tax law **
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