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'SPECIAL REPORTS.
How multinational corporations avoid paying their taxes.

By Peter Rost, M.D.
Online Journal Guest Writer

The biggest tax scam on earth has a very innocent sounding name. It is called “transfer prices.” That almost sounds boring. It is, however, anything but boring. Abuse of transfer prices is a key tool multinational corporations use to fool the U.S. and other jurisdictions to think that they have virtually no profit; hence, they shouldn’t pay any taxes.
Corporations involved in this scam are “model corporate citizens,” or so they would like us to believe. The truth is that they rob us all blind. The money we lose can be estimated in the tens of billions, or possibly hundreds of billions of dollars every year. We all end up paying higher taxes because rich corporations make sure they don’t.
But don’t take my word for this.
A few weeks ago, U.K.-based GlaxoSmithKline (GSK), one of the largest pharmaceutical companies in the world, together with the Internal Revenue Service (IRS) announced that GSK will pay $3.4 billion to the IRS to settle a transfer pricing dispute dating back 17 years. The IRS alleges that GSK improperly shifted profits from their U.S. to the U.K. entity.
And U.K. pharmaceutical companies are not alone with these kinds of problems. Merck, one of the largest U.S. drug companies, also this month disclosed that they face four separate tax disputes in the U.S. and Canada with potential liabilities of $5.6 billion. Out of that amount, Merck disclosed that the Canada Revenue Agency issued the company a notice for $1.8 billion in back taxes and interest “related to certain inter-company pricing matters.” And according to the IRS, one of the schemes Merck used to cheat American taxpayers was by setting up a subsidiary in tax-friendly Bermuda. Merck then quietly transferred patents for several blockbuster drugs to the new subsidiary and then paid the subsidiary for use of the patents. The arrangement in effect allowed some of the profits to disappear into Merck’s own “Bermuda Triangle.”
I have described many more ways the global drug industry cheats and defrauds our government in my recent book, “The Whistleblower, Confessions of a Healthcare Hitman.” In this article, however, I’m going to focus on how they, and other rich multinationals, use the tax system to defraud us.
So what’s going on here, how have multinational drug companies been able to gouge us for years selling expensive drugs and then avoid paying tax on their astronomical profits?
The answer is simple. For companies in certain businesses, such as pharmaceuticals, it is very easy to simply “invent” the price a company charges their U.S. business for buying the company’s product which they manufacture in another country. And if they charge enough, poof; all the profit vanishes from the US, or Canada, or any other regular jurisdiction and end up in a corporate tax haven. And that means American and Canadian taxpayers don’t get their fair share.
Many multinational corporations essentially have two sets of bookkeeping. One set, with artificially inflated transfer prices is what they use to prepare local tax returns and show auditors in high tax jurisdictions, and another set of books, in which management can see the true profit and loss statement, based on real cost of goods, are used for the executives to determine the actual performance of their various operations.
Of course, not every multinational industry can do this as easily as the drug industry. It would be difficult to come up with $6,000 toilet seats. But the drug industry, where real cost of goods to manufacture drugs is usually around 5 percent of selling price, has a lot of room to artificially increase that cost of goods to 50 percent or 75 percent of selling price. This money is then accumulated in corporate tax havens where the drugs are manufactured, such as Puerto Rico and Ireland. Puerto Rico has for many years attracted lots of pharmaceutical plants and Ireland is the new destination for such facilities, not because of the skilled labor or the beautiful scenery or the great beer -- but because of the low taxes. Ireland has, in fact, one of the world’s lowest corporate tax rates with a maximum rate of 12.5 percent.
In Puerto Rico, over a quarter of the country’s gross domestic product already comes from pharmaceutical manufacturing. That shouldn’t be surprising. According to the U.S. Federal Tax Reform Act of 1976, manufacturers are permitted to repatriate profits from Puerto Rico to the U.S. free of U.S. federal taxes. And by the way, the Puerto Rico withholding tax is only 10 percent.'

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