By Lucy Komisar
Inter Press Service (IPS), Feb 23, 2007
Last week, Merck, the pharmaceutical multinational, announced that it will pay 2.3 billion dollars in back taxes, interest and penalties in one of the largest settlements for tax evasion the U.S. Internal Revenue Service (
Merck had cooked its tax books by moving ownership of its drug patents to its own Bermuda shell company — an entity that has no real employees and does no real work — and then deducting from
Merck also faces legal action in
What Merck did isn’t unusual but in fact is becoming common for multinationals in the era of globalisation. It’s one of the ploys in a corporate bag of tricks called profit laundering. A company figures out how to move its book profits offshore so it can evade millions and even billions in taxes to the country where it really operates. In an era where much of a company’s assets may be intangible intellectual property — patents, logos, manufacturing processes — this strategy can make reported profits and taxes disappear.
People understand that nations’ economies are hurt when jobs move overseas. But what happens when intellectual capital, on which the increasingly knowledge-based economy depends, is also moved out?
The cost of manufacturing drugs or computer technology is minimal compared to the cost of research and development. So, beginning in the early 1990s, several dozen pharmaceutical and computer companies established subsidiaries in
They set up shell companies and transferred patents or logos or other intangible property there. Then, when profits rolled in, the company paid big license fees or royalties to its own shell — at the price it decided — and deducted that from home taxes. Revenues were sucked out of the
Although almost 60 percent of U.S. pharmaceutical companies’ sales take place in the U.S., where the government’s refusal to control drug prices makes profits higher than elsewhere, the companies report to the
Last year, Martin Sullivan, a former U.S. Treasury Department economist, noted in the journal Tax Notes that pharmaceuticals had accelerated their movement of profits to low-tax jurisdictions. He wrote that In 1999, foreign profits accounted for 39.2 percent of worldwide profits of large
He figured that the companies’ foreign assets were 41 percent and their sales 43 percent of the world total, so that foreign profits should be 43 percent. But the companies reported them as 66 percent, cheating the
U.S.of 23 percent of profits. That amounted to nearly three billion dollars a year from nine drug companies, including Merck, which cut 1.5 billion dollars from its taxes over a decade.
Prime technology companies playing the offshore game are Microsoft and Google. Microsoft gets about 75 percent of its 40 billion dollars in revenue from licensing fees. A few years ago, it set up an Irish subsidiary called Round Island One Ltd. to own its 16 billion dollars worth of copyrights on software developed in the
In 2004, it shifted nine billion dollars in profits to
Google similarly set up an Irish subsidiary, Google Ireland Holdings Ltd, which in 2004, its first year, helped the company avoid paying about 131 million dollars in U.S. taxes. Google noted in its annual report that year that it expected its effective tax rate to drop even more significantly. It explained, This is primarily because proportionately more of earnings in 2005 compared to 2004 are expected to be recognised by our Irish subsidiary, and such earnings are taxed at a lower statutory tax rate (12.5 percent) than in the
Both companies may have some minimal operations in
The situation is getting worse. According to
The result of this and other sorts of tax trickery is that nearly two-thirds of the companies operating in the United States reported owing no taxes from 1996 through 2000, according to a 2004 report by the investigative arm of Congress, the Government Accountability Office.
Jack Blum, an expert on tax evasion and former counsel for the Senate Foreign Relations Committee, said, Since the 1960s the percentage of tax revenue at the federal level that comes from corporations has declined from around 30 percent to around 8 percent. A substantial portion of this decline is the consequence of the ability of companies with global operations to shift income to jurisdictions where tax collectors cannot find it.
The U.S. Treasury and
Most of the 2.3 billion dollars Merck has to pay is back taxes and interest; only 100 million dollars is penalty. No Merck official has been charged with a crime. That signals that companies have little to lose by continuing their tax scams.
The Financial Times reported in 2004 that Merck would have failed to meet consensus earnings forecasts without the improved [tax] rates. Merck may think it took a profitable risk.
Photo of Mark Everson by Lucy Komisar.