Drug companies give their tax affairs a clean bill of health ahead of Senate grilling

Multinational drug companies are presenting a united front ahead of their appearance at the Senate’s corporate tax avoidance inquiry, insisting they are honest, ethical and pay their fair share of tax.

Nine pharmaceutical companies, which between them receive billions of dollars in taxpayer-subsidised sales via the Pharmaceutical Benefits Scheme, will come under the microscope after Australian Tax Commissioner Chris Jordan said some drug-makers had attempted to “back profits out” of Australia through a combination of transfer pricing and royalty payments to their subsidiaries in other countries.

Mr Jordan told a Senate estimates hearing this month that some pharmaceutical companies were among the “more aggressive [on] transfer pricing” — where a global company charges itself higher prices for imported products, reducing its profitability and its tax bill in Australia.

Fairfax Media recently revealed research by the parliamentary library which found the top five pharmaceutical suppliers to the PBS, which include Pfizer, Novartis and AstraZeneca, received $2.8 billion in public money last year.

Their total Australian sales were $4.8 billion but they paid just $53 million in tax between them or roughly 1¢ in tax for every dollar earned in Australia.

Bloomberg reported in 2013 that the six biggest drug makers in the United States had avoided paying $US7 billion the previous year. Those companies included four of the same companies that will appear before the Senate committee in Sydney on Wednesday.

In 2012, GlaxoSmithKline was forced to pay US tax authorities $US3.4 billion to settle a transfer pricing dispute.

But in nine separate submissions to the Senate inquiry, the companies insisted all international transactions are taken at “arm’s length” and each had an effective and open relationship with the Australian Tax Office.

In strikingly similar submissions, the majority of companies declared an effective tax rate — calculated as tax paid compared to reported net profit — at or above the mandatory 30 per cent company rate.

Johnson & Johnson, which paid just $20.7 million in tax in Australia in 2013, said it had a “longstanding approach to corporate governance and paying the correct amount of tax based on a strong global culture of transparency, ethical behaviour, integrity and respect”.

The company, which employs 1600 people in Australia and has sales of around $1.5 billion, said it spent the equivalent of $1 in every $5 of sales on research and development and each new product costs an average of $US2.6 billion and ten years to develop before bringing to market.

“For J&J worldwide, the entrepreneurial activities associated with research and development and manufacturing are performed and borne by J&J companies outside Australia. The profit margins earned by JJPL companies [Australia] for the distribution functions performed in Australia … provides fair economic return determined under arm’s length principles and in accordance with the Organisation for Economic Cooperation and Development (OECD) transfer pricing guidelines,” it said.

Johnson and Johnson and a number of other companies said they had entered “advance pricing agreements” with the ATO which provided a “robust” assessment of their true profitability.

GlaxoSmithKline said its global supply chain could be “complex” to understand for local tax authorities.

Pfizer, which supplies the common cholesterol drug Lipitor through the PBS, said key products like Lipitor, Celebrex and Viagra have lost patent exclusivity, impacting its profitability.

“To put this into context, Lipitor, the biggest selling product in pharmaceutical history, began facing generic competition in 2012. Since then, annual revenue derived from Lipitor has dropped by approximately 95%, from $700 million to approximately $40 million,” Pfizer said in its submission.

It said government cuts to PBS-listed medicines had also dampened sales.

AstraZeneca said a 2010 review of transfer pricing by the ATO had assessed the company as “medium to high quality”.

They considered that our level of profit was ‘commercially realistic’ and determined that our transfer pricing risk was ‘low’,” it said.

The Big Pharma companies are likely to meet robust questioning from the Senate committee which drew national headlines when it cross-examined tech giants Google, Apple and Microsoft earlier in the year.

Committee chairman Sam Dastyari said: “The numbers just don’t add up. Despite record sales and revenue, profit-shifting means their ‘reported profit’ is minuscule.

“For Big Pharma, it seems, the tax bill is the hardest pill to swallow.”