There were predictions the budget would save as much as $5 billion from the Pharmaceutical Benefits Scheme (PBS) over five years.
Yet the government, it seems, has been spooked again by Big Pharma and the amount will be much smaller. Instead of billions saved, there is a mere $252 million in PBS cost savings over five years and – surprise, surprise – ongoing talks.
“The government … is in the final stages of negotiations with industry on reforms to pricing and remuneration across the supply chain to underpin the future sustainability of the PBS,” came the three-liner, interred deeply in the bowels of the budget papers.
Big Pharma is fighting tooth-and-nail to fend off a 5 per cent cut in what the Commonwealth, and therefore the taxpayer, pays for prescription drugs.
So it is that Treasurer Joe Hockey and Health Minister Sussan Ley will hardly have been displeased by revelations that Pfizer, like many multinationals, is engaged in a rapacious tax avoidance scheme in Australia.
The usual political conundrum prevails; how to juggle public interest with demands from powerful vested interests.
Interests who aren’t shy about participating in politics.
The Liberal Party’s latest annual return with the Australian Electoral Commission shows the manufacturer of Viagra bankrolled the Liberals for $28,304 and the Labor Party for $26,431 last year.
Today we can lend the government another hand however. Hockey and Ley can roll up this newspaper and bash Big Pharma about the chops with it.
For, it is not only through suspicious-looking capital creation and capital stripping schemes that Pfizer reduces its obligations to the Australian Tax Office, it is also through “cost of sales”. Put succinctly, it loads up its costs in this higher-tax jurisdiction in order to get its profits down – and therefore its tax liabilities down – while rerouting profits to the US.
This is a harder case for the Tax Office to prosecute than the capital stripping scheme but it is blatant nonetheless.
Consider this analysis from University of NSW accounting academic Jeff Knapp.
He says Pfizer’s cost of sales as a percentage of revenues is four times higher in Australia than in the United States. In the US, the ratio is 19.3 per cent, 18.6 per cent and 18 per cent in the last three calendar years.
In Australia life is apparently much harder. The ratio is 73.5 per cent, 74.9 per cent and 72.5 per cent for the same years.
Are we to believe that Pfizer is so inefficient in this country that it costs the company 400 per cent more to sell its drugs?
“From its worldwide operations therefore, every $10 sale generates $8 of gross profit but in Australia only something like $2.50 is leftover,” says Knapp.
“And there is another dysfunction in the gross profit margin in Australia. It appears to be getting smaller and smaller over time; from 36 per cent in 2005, down to 26 per cent in 2014.”
Highly suspicious yet again; why are revenues falling off a cliff?
Pfizer Australia Holdings has a revenue trajectory over 10 years that defies the growth in the Pfizer product range, population growth and inflation, says Knapp.
Its revenues for 2005 were $1.4 billion. After business acquisitions during 2011, revenues hit a high point of $2 billion. Pfizer Australia’s revenues for 2014 were $1.2 billion; less than revenues in 2005 and 40 per cent lower than in 2011.
Perhaps Pfizer has a good explanation for this but it has point-blank refused to speak to Fairfax Media, at least with this reporter.
We can only presume that it has either sent good revenue-producing assets offshore or is otherwise contriving to book revenues in other jurisdictions.
So it is that Pfizer Australia’s income tax paid as a percentage of revenues is 2.1 per cent. There is little point in comparing income tax paid with fake profit figures after this demonstrably inflated cost of sales – a typical multinational tax avoidance ploy.
Total revenues over 10 years to November 2014 are $14.2 billion, that is, on average 1.4 billion per year. Total income tax paid over ten years to November 2014 is $294.7 million, that is, on average $29.5 million per year.
Talk about double dipping: the taxpayer funds the PBS while this big PBS beneficiary hoodwinks the taxpayer.
The low profitability of Pfizer Australia’s sales and the decline in its revenues over the last decade defies logic.
Knapp compares it with Australian group Blackmores. Blackmores revenue has grown 47 per cent in 2011 compared to Pfizer’s 40 per cent plunge.
Over the last decade Blackmores has a cost of sales around 36 per cent of revenues and pays income tax of around 4 per cent of revenues.
If Pfizer Australia Holdings was paying income tax of 4 per cent of revenues, the country would have another $294 million plus interest over the last 10 years. There might even be more funds to go around for critical health areas such as combating drug addiction in rural Australia.