Bottom of the canal: Pfizer’s billion-dollar tax ploy



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The Netherlands is where nearly $1 billion from Australia was sunk into two companies liquidated three years later.
Alex de Haas/flickr, CC BY-NC

Michael West, University of Sydney

Pharmaceutical giant Pfizer has engaged in a series of paper transactions to create a A$936 million loss in Australia. It is, for all intents and purposes, a billion-dollar exercise in tax avoidance.

Pfizer and its auditor KPMG, the “Big Four” global accounting firm, refused to comment on the transactions or to defend them when presented with questions by this columnist. Pfizer was contacted on numerous occasions and refused. Both parties refused to return emails and phone calls.

These are transactions housed within a byzantine corporate structure. We will outline, in brief, the series of transactions with Pfizer associates in the Netherlands which led to this “bottom of the canal” tax scheme, then provide the background to the company’s activities.

The sequence of transactions

2011: Pfizer Australia Investments Pty Ltd issues $728 million in shares to Pfizer companies in the Netherlands, the US and Luxembourg.

Pfizer Australia Investments (PAI) then uses the cash from this share issue to buy two subsidiaries incorporated in the Netherlands. These are called Pfizer Australia Investments B.V. and Pfizer Pacific Cooperatief U.A.

There is no record of these two companies in Pfizer’s global accounts before December 31 2010.

2014: PAI issues more shares and invests another $208 million in the two Dutch companies. This brings the total investment in these companies to $936 million.

By the end of 2014, the Dutch subsidiaries have been liquidated with zero return for PAI. The financial effect of this round-robin transaction is that share capital of $936 million has been created in Pfizer’s Australian entity and losses of $936 million are recorded in Australia.


Michael West/Rachell Li, Sydney Democracy Network

This ring-a-ring-a-rosy has all the hallmarks of a transaction designed to create almost a billion dollars in losses which can be used for tax purposes in Australia. The Australian company has “invested” almost a billion dollars into two overseas companies which were suddenly liquidated – with no value left for shareholders. Nothing is heard of them since.

It brings to mind the infamous Bottom of the Harbour tax schemes of the 1970s and ’80s where the financial engineers – aided by the top end of the accounting community – made investments in companies, stripped those companies of their assets and left nothing for the taxman.

In Pfizer’s case, almost $1 billion of cash was “invested” in two companies in the Netherlands which went belly up within three years. That left the Australian entity – indeed Australian taxpayers – carrying the can for its losses as the freshly created $1 billion in share capital is now sitting pretty for tax-effective distribution to Pfizer overseas.

A company with form

Pfizer has form on such transactions.

Back in 2011, another Pfizer entity, Pfizer Australia Holdings, created new share capital of $733 million after it bought two subsidiaries from Pfizer Inc. The two subsidiaries were acquired for hundreds of millions of dollars.

Pfizer issued shares, rather than paid cash, to buy these assets from themselves. So, new shares were created at a value of $733 million. This enormous price relied on a fancy asset valuation for the intangible assets held by these subsidiaries, notably “product development rights” of $461 million. These were the main assets acquired.

By 2014, share capital of $408 million of this new share capital had been returned in cash, repatriated to Pfizer companies overseas. And the product development rights had already evaporated (amortised) by $161 million.

Share capital created, assets written off, again. This is the Pfizer pattern. Share capital is created and its assets vanish.

On December 1 2014, yet another Pfizer entity here, Pfizer PFE Pty Ltd, acquired the Innovative Products Oncology and Consumer business from Pfizer Australia Holdings for nil consideration. This included the mysterious product development rights. Nil consideration. These are the rights valued three years earlier at $461 million.

Traditionally, when one company acquires a business from another company, one company is the buyer and the other company is the seller. This immutable principle of commerce does not necessarily pertain to Pfizer.

Pfizer Australia Holdings describes the transfer of this Innovative Products business as a “distribution”, a “transaction with owners in their capacity as owners”, according to its statutory financial statements.

In reality it is no such thing. Pfizer PFE is not an owner of Pfizer Australia Holdings. It holds no shares. It is merely a related party with a common ultimate parent in the US, Pfizer Inc.

Behind this narrative of a “distribution to owners” is tax. When you make profits of hundreds of millions of dollars, avoiding the 30% corporate income tax rate is big business.

Then and now

In 2007, Pfizer Australia Holdings was at the helm of Pfizer’s tax consolidated group in Australia and prepared “General Purpose” financial statements, full financial statements and full disclosures.

In 2008, it switched to preparing “Special Purpose” financial statements with far less disclosure, especially about income tax. KPMG’s 2008 audit report gave this special purpose report a clean bill of health even though required disclosures of changes in accounting policies were not made.

From 2009 to 2012, Pfizer Australia Holdings paid franked dividends to shareholders of $576 million; that is more than half-a-billion dollars going overseas. This is the good stuff, though, the above-board stuff, dividends paid out of profits already taxed in Australia.

After 2012, Pfizer ran out of Australian profits to distribute. It had hit the “patents cliff”. The blockbuster drugs Lipitor and Viagra were coming off patent and being challenged by generic competitors. Pfizer’s sales peaked at $2.2 billion in 2012. This used to be the biggest pharmaceutical company in the country.

Yet Pfizer had hit another cliff. The company was running out of Australian profits to distribute as dividends. It needed another way to rake the money offshore. And it came in the guise of return of share capital – better than dividends as there are far lighter tax obligations.

In 2014, a return of capital of $408 million was made offshore. And now, in 2016, Pfizer has made sure, through transactions with associates in the Netherlands, that there is another billion dollars ready to go offshore when the US overlords make the call.

Two things stand out, two takeaways from the “magic pudding” of Pfizer share capital creation and its bottom-of-the-canal tax scheme.

One, PAI’s audited financial statements claim that two Netherlands subsidiaries were incorporated in Australia. We can find no record of this.

Two, in 2014, PAI invested $208 million in the two Netherlands subsidiaries that were liquidated in the same year for no return. What is an observer to make of that?


The ConversationThis column, co-published by The Conversation with michaelwest.com.au, is part of the Democracy Futures series, a joint global initiative between The Conversation and the Sydney Democracy Network. The project aims to stimulate fresh thinking about the many challenges facing democracies in the 21st century.

Michael West, Adjunct Associate Professor, School of Social and Political Sciences, University of Sydney

This article was originally published on The Conversation. Read the original article.

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Rumours of the death of multinational tax avoidance are greatly exaggerated


Michael West, University of Sydney

The Australian government took out newspaper ads earlier this month boasting of unequivocal victory in the fight against multinational tax avoidance.

It is no small irony that taxpayers have forked out for this bald-faced lie. “Multinational corporations earning Australian dollars now pay their fair share of Australian tax,” decreed the ad.

The Australian government advertisement falls a long way short of telling the whole truth about multinationals’ tax.
Commonwealth of Australia

Hardly. While it is true that the Australian Tax Office (ATO) and the federal government have reaped more income tax from multinationals this year than they had earlier anticipated, this is a fight that has only just begun.

Were it not for increasing community awareness of multinational tax avoidance – the world’s biggest rort – and rising concern over tax fairness, things would be worse. So the positive perspective is that, yes, inroads are being made via the diverted profits tax, the ATO’s tax avoidance task force and the multinational anti-avoidance law, which was enacted late in 2015.

Tax Office people privately confide, too, that another A$2 billion may drop this year. That’s A$2 billion on top of earlier expectations – A$1 billion from tightened enforcement and another A$1 billion from “behavioural” factors: better behaviour by some multinationals, in other words.

As the swathe of December year reports have flowed through this month and last, it is evident that some companies such as Google and Facebook have been paying more tax, albeit slightly more and still well short of reasonable amounts.

Same old tricks

Others, such as oil giants Exxon, Shell and Chevron, digital players Booking.com, Airbnb, Expedia and eBay, and assorted others such as American Express are up to their same old tricks. We are presently analysing Big Pharma, a sector that is swimming in taxpayer subsidies thanks to the Pharmaceutical Benefits Scheme (PBS) and then has another bite of the cherry via transfer-pricing shenanigans as well.

To a couple of serial offenders, Goldman Sachs and News Corporation. The 2016 financial statements for “Goldies”, as the Giant Vampire Squid is affectionately known in financial markets, are utterly inadequate.

For a start, they are not even consolidated, so don’t provide a true picture of the profitability of Wall Street’s famous, or infamous as many would put it, investment bank. Its head entity in Australia, Goldman Sachs Holdings ANZ Pty Ltd, discloses revenues of just US$24 million, the same as the prior year and well shy of the US$45 million booked in finance costs. Then the profit and loss statement shows an income tax “benefit”, yes benefit, of US$2.4 million, compared with last year’s benefit of US$18.5 million. There was a bottom-line loss in both years.

On this, it would appear that Goldman has paid zero tax in the past three years in Australia. Travelling along to the cash-flow statement, though, they disclose US$286 million was paid in tax last year (down from tax received of US$8.5 million). But when you get to the notes to the accounts it shows an income-tax benefit of US$2.4 million.

All of this is meaningless, of course. As the accounts are not consolidated, they don’t disclose what has been going on in the whole group. Further, tax may have been paid in Hong Kong, the domicile of the immediate parent, or elsewhere.

The usual feature of high finance charges and large related party loans are there, not to mention “service fee expenses” with related parties. Merchant banks such as Goldman Sachs, being banks, get away with a lot on the tax front.

Our very own Macquarie Bank had a keen reputation for tax structuring until it got pinged by authorities three years ago. In 2008, it even recorded a tax rate of 1.7% after a jumbo “tax arb” transaction, a currency swap so successful that it delivered a profit of A$850 million in Asia and a matching loss in Australia.

So a billion-dollar profit bore almost no tax.

At least Macquarie pays homage to financial accounting standards and doesn’t file a pitiable and arguably non-compliant set of accounts like Goldman. ASIC could issue an edict tomorrow, if it had the courage and a burst of energy, decreeing that any multinational company operating in Australia had to file proper “General Purpose” accounts.

Feeling the heat

This brings us to the entity formerly identified as the nation’s number one “tax risk”, Rupert Murdoch’s News Corporation. That mantle has probably gone to Chevron now. After being rapped over the knuckles by the Senate Inquiry into Corporate Tax Avoidance two years ago, News has begun to pay more tax: A$110 million last year.

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The main ruse was to create A$7 billion in “goodwill” in 2004 via a string of related party transactions and then to rip out A$4.5 billion in profits to the US.

News is still deploying this “repatriation of capital” subterfuge to this day. This practice may be legal but it is unethical. The creation of “internally generated goodwill” could be described as suspect in the least. A “magic pudding” was the way former University of NSW accounting academic Jeffrey Knapp labelled it.

Over the ten years to 2015, Rupert Murdoch’s companies paid income tax equivalent to a rate of 4.8% on A$6.8 billion in operating cash flows, or just 10% of operating profits.

The basic numbers for the past two years are: A$110.5 million tax on revenues of A$3.1 billion and profit of A$156 million. In
2015, it was A$109 million tax paid on revenues of A$2.95 billion and profit of A$287 million.

They are still aggressively debt loading, however, or giving themselves loans from overseas so they can rip out interest before paying tax. The critical numbers are A$2.6 billion in related party borrowings on which they paid A$130 million to themselves in related party interest charges offshore. Overall, debt jumped from A$2.4 billion to $4.3 billion.

A A$411 million loan to Foxtel, which News owns with Telstra, remains. The interest rate on this loan is 10.5%, more than double what the average wage earner pays on a mortgage. This is another ruse to avoid tax.

All in all, it’s a better effort from News, but the evidence on multinational tax avoiders is in. There is improvement, but still a very long way to go.


The ConversationThis column, co-published by The Conversation with michaelwest.com.au, is part of the Democracy Futures series, a joint global initiative between The Conversation and the Sydney Democracy Network. The project aims to stimulate fresh thinking about the many challenges facing democracies in the 21st century.

Michael West, Adjunct Associate Professor, School of Social and Political Sciences, University of Sydney

This article was originally published on The Conversation. Read the original article.

Deadline for re-registration passes; churches face illegal status


Oppressive new laws in Azerbaijan and Tajikistan required religious communities to re-register with the government by January 1, 2010 or face illegal status. As of December 16, only about 100 of Azerbaijan’s 534 religious communities had been able to do so. Fewer than half of Tajikistan’s religious communities re-registered, reports MNN.

According to Joel Griffith of Slavic Gospel Association, officials place obstructions in the paths of churches trying to re-register.

"They will find some technicality or basically any reason to deny registration. So even if some of the groups actually follow the law to the letter and meet the requirements, it just seems very arbitrary and capricious as to whether the officials will agree to register to not," he explained.

It’s unclear how strictly the governments of the two nations will enforce their laws.

"In the worst case scenario…they could basically close congregations down and impose pretty stiff penalties," Griffith said. "In the best case scenario…unless they agree to fully repeal these statues or amend these laws, I think we need to just hope and pray that even though they’re on the books, these things won’t be enforced."

That’s often the case in countries that have similar laws. The new laws include other burdensome requirements in addition to the re-registration mandate. Azerbaijan’s law requires religious communities to provide more information for registration and to obtain approval to build or rebuild places of worship. It also prohibits the sale of religious literature in unapproved locations and religious activity outside registered addresses.

Tajikistan’s religion law censors religious literature, bans state officials from founding religious communities, requires state approval to invite foreigners for religious visits or to travel abroad for religious events, and restricts children’s religious activity and education.

Christians in Azerbaijan are especially concerned about how courts might interpret unclear provisions in the law. They fear a loose interpretation could penalize "peaceful religious activity." Griffith quoted a passage from the law and explained the issue.

"‘The community formulates its relations with other religious confessions on the basis of religious toleration (tolerance), respect and the avoidance of conflict,’ and the community cannot use violence or the threat of violence in proclaiming its faith. Well, if you don’t define those terms, such as ‘respect and the avoidance of conflict’…you could almost say that Christian evangelism could even be illegal under a formulation like that."

Since Christians believe in only one means of salvation — Jesus Christ — it would be entirely possible for disagreement with other religious groups to be interpreted as "conflict." However, Christians are not the only people worried about the potential impact of the law.

"It’s not just Christians that are concerned; we’ve got Muslim groups that are concerned. These are largely Muslim nations," Griffith said. "I think there are a number of people that are concerned about what this will possibly do down the road."

No matter what does happen, the Christian church will remain committed to the Gospel.

"Regardless of what happens in these countries, the churches still have their marching orders from the Lord: to proclaim the Gospel," Griffith said. "And no matter what man does, they’re going to continue to proclaim the Gospel."

Christians in Tajikistan and Azerbaijan need the prayers and support of their fellow believers. SGA has been supporting churches in the former Soviet Union for 75 years, and it continues to support churches in these two countries.

"It’s important to help them take advantage of every open door they can find to share the Gospel," Griffith said. "It might be through supporting a church-planting missionary; it might be through providing Russian-language Bibles and literature; it may be through helping to support in-country training, and sometimes that training has to take place quietly…. But for churches here in the West that have the resources, it’s important to support our brothers and sisters there who don’t have the resources that we do."

Report from the Christian Telegraph