FTSE 100 companies set aside £2.4bn for tax disputes

FTSE 100 companies have had to increase the amount of money they set aside to cover the cost of tax disputes and litigation by an additional £139m taking provisions for tax disputes to £2.39bn in the last year – up from £2.25bn in the previous year, reveals Thomson Reuters legal business, the world’s leading source of intelligent information for businesses and professionals.

Thomson Reuters says that with tax authorities around the world continuing their efforts to increase tax revenues, companies continue to find themselves in potentially costly tax disputes which individually can be worth hundreds of millions of pounds.

UK listed pharmaceutical companies made the biggest provisions for tax disputes and litigation in the last year, with the three big UK pharmaceutical companies accounting for 79%, or £1.89bn, of the total FTSE 100 provisions for tax disputes and litigation. That was an increase from £1.68bn in the previous year.

AstraZeneca made the largest provision for tax disputes out of all FTSE 100 companies, increasing its provision from £1.32bn to £1.53bn.

Pharmaceutical companies can come under intense scrutiny by tax authorities over their transfer pricing arrangements – the allocation of the costs of an international business across the different countries in which it operates.

Transfer pricing may result in potential profits in higher tax jurisdictions being moved to lower tax jurisdictions. Tax authorities will investigate if they think the company has used artificial arrangements to achieve that result.

It is not uncommon for a global pharmaceutical company to be subject to a number of different transfer pricing investigations undertaken by different tax authorities around the world.

“Pharmaceutical companies have been at the centre of many of the biggest ever tax disputes. That is partly become the revenues that flow from one part of a pharmaceutical business to another are huge – meaning so much potential tax is at stake,” Raichel Hopkinson, Head of the Practical Law Dispute Resolution Service at Thomson Reuters, explains.

“Under pressure from governments to recoup more tax, authorities around the world have been adopting much more aggressive methods and interpretations of tax rules to clamp down on what they see as tax avoidance by businesses.”

Thomson Reuters legal business says that as well as facing investigations into their own affairs financial services companies are increasingly at risk of blockbuster fines where they are seen to have assisted their customers in tax evasion or avoidance. For example, at least three FTSE 100 financial services groups have confirmed that they are under investigation by the Department of Justice in the US relating to tax evasion by US clients.

Credit Suisse recently agreed to pay a US $2.6billion penalty in relation to possible tax evasion by its US clients.

The success of businesses in tax litigation is not only important in terms of avoiding fines but also because successful tax litigation can see tax payments reduced and provisions released back to the company. For example one FTSE 100 company was able to release back £137m in taxes as a result of a successful resolution of a dispute.

However, Thomson Reuters adds that becoming involved in a lengthy tax dispute in public may also have considerable effects on the company’s reputation and brand.

“The public’s perception of a company is partly based on whether it is a ‘good citizen’ and that includes being seen to pay a fair amount of tax.  Protracted litigation over tax issues may be damaging from a PR perspective,” says Raichel Hopkinson.

“That’s especially an issue for a company that is consumer-facing.”