Big Pharma’s secret pricing tactics keep staff and ATO in the dark

Even country bosses for ‘big pharma’ were kept in the dark about product pricing matters. Photo: Louie Douvis

Andrew Nicholl had a 25 year career as an executive in the pharmaceutical industry. He held senior leadership roles in Australia and overseas where he worked as a managing director in Taiwan, Venezuela and Hong Kong for three of the top five global pharmaceutical companies.

Even as a country boss for “big pharma”, Nicholl said he was often kept in the dark about product pricing matters.

“The actual cost of the product was always closely guarded by headquarters and not freely or willingly shared with local management,” he said.

“At a subsidiary or country level, all we were given was the transfer price that the company gave us. The real “upstream” P&L (profit and loss) of the country I was managing was never really known to me.”

The secrecy over transfer prices and the actual cost of goods has been the same in all of these large companies, said Nicholl, who spoke with Fairfax Media after recent revelations the Australian Tax Office was investigating some of the pharmaceutical majors for tax avoidance.

The five biggest suppliers of publicly subsidised medicines in Australia recorded sales of nearly $5 billion last year but paid an average of just $10 million each in company tax.

A study by the parliamentary library – requested by the Senate committee investigating corporate tax avoidance – found the top five pharmaceutical suppliers to the Pharmaceutical Benefits Scheme (PBS) received $2.8 billion in public money last year.

Their total Australian sales were $4.8 billion, but their combined profits were just $50 million. They paid $53 million in tax between them – or roughly 1¢ in tax for every dollar made in Australia.

The Budget Office figures for GlaxoSmithKline for instance showed the company cost the taxpayer $308 million under the PBS last year. It recorded sales of $952 million for the year, declared a profit of just $22 million and paid a mere $1.5 million in tax.

GSK has recorded $6.6 billion in sales over the past five years in Australia – and received $1.2 billion in taxpayer subsidies under the PBS – but has produced profits of only $154 million.

It is typical of multinationals to structure their tax affairs to minimise profits in Australia while transferring profits to tax havens and to their offshore headquarters.

Transfer pricing is one of the main methods to funnel profits offshore. That is, the Australian subsidiary will be charged higher prices for product by head office, which has the effect of lowering taxable profits in this country.

An investigation by Fairfax Media found Pfizer’s cost of sales as a percentage of revenues is four times higher in Australia than in the United States.

Over the past three calendar years, the ratio in the US has been 19.3 per cent, 18.6 per cent and 18 per cent.

Over the same period in Australia, the ratio has been 73.5 per cent, 74.9 per cent and 72.5 per cent.

Nicholl said it was always very unclear and never explained adequately how the local transfer price for any product was set.

“Only in exceptional cases would I ever find out what the ‘real’ cost of goods for a specific product was and headquarters would rarely give anything in writing,” he said.

“Occasionally, due to payor price cuts (like a PBS price cut) on a certain drug the local cost of goods of a product due to the transfer price set by headquarters would be more than the local price, meaning a local loss on that product until the transfer price was adjusted which was not usually until we did the annual budget in the following financial year.”

Nicholl expressed concern that transfer pricing by multinational companies was undermining the tax base of the countries in which they operated.

The Senate committee’s interest in “big pharma” followed comments by the Australian Tax Commissioner Chris Jordan who told a Senate estimates hearing last month that at least four global drug makers were being audited by the tax office.

The hearing heard the multinationals reported higher profits in their overseas divisions through both transfer pricing and royalty payments for intellectual property which was held in jurisdictions with far lower tax rates.

Andrew Nicholl’s experience suggests that multinational operations like these of Big Pharma should be taxed as a branch rather than a body corporate; that is, they should be taxed on gross income less any deductions they can prove are not eliminated on consolidation. If they can’t prove that the expense is not eliminated or their organisation won’t supply the information needed to prove absence of elimination then the whole of the relevant claim should be disallowed.