French drug giant Sanofi is the textbook case of the tax-avoiding, corporate-welfare-loving multinational colossus taking Australian taxpayers and consumers to the cleaners.
An investigation of nine years of financial statements by Sanofi-Aventis Australia Pty Ltd, has found the company paid income tax of just $106.5 million on revenues of $7.5 billion, just 1.4 per cent.
The trend however is for increasingly belligerent tax avoidance. Over the past five years, Sanofi has paid just $19.7 million in tax on revenues of $4.1 billion; this despite billions in subsidies from Australia’s Pharmaceutical Benefits Scheme (PBS).
In order to pull off this tromperie of tax avoidance, Sanofi has deployed most of the devious strategies from the multinational playbook:
It has pulled the marketing expenses lever: racking up a ludicrous $1.3 billion in “marketing expenses”, despite selling Lantus, the most prescribed basal insulin in the world, a medicine which needs little marketing.
It has pulled the debt-loading lever: racking up large borrowings from another Sanofi entity overseas in order to rip out pre-tax profits via onerous interest charges.
It has pulled the offshore capital return lever via a share buy-back with a US entity in 2009.
It has pulled the darkness and non-disclosure lever: switching to skimpy Special Purpose reporting from General Purpose reporting in 2006.
It has pulled the marketing hub lever: shuffling its boxes of pills from Germany to France to Singapore to Australia to run down taxable profits thanks to three layers of unnecessary costs.
It has pulled the political bribery lever: forking out a plethora of donations to the Liberal Party, the Labor Party and the National Party, year-in year-out, to keep government off their backs.
It has pulled the corporate welfare lever: claiming billions in taxpayer subsidies for its pharma products from the PBS while having the cheek to claim R&D offsets.
It pulled the overpaying for acquisitions lever: stumping up $549 million in intangibles (total purchase price $562 million) for something it bought in 2009. Creating losses is de riguer for the multinational.
It has pulled the Big Four accounting firm lever: paying EY to sign off on its accounts as if its auditor somehow brought integrity to its statutory disclosures.
The rub is, this is fairly typical multinational behaviour. As is the smokescreen which is its rhetoric and manicured public image.
In the ETHICS section on the Sanofi website, you will find the following:
“Our company believes every employee and contractor must abide by the highest ethical principles. Therefore, our success depends upon the legal and ethical behaviour of every employee. Sanofi has established strong ethical standards that are described in our business Code of Ethics. Our Code is based upon our company values and the culture we promote throughout our organisation. We believe that economic performance cannot be dissociated from responsibility.”
It is telling that directors and auditors are not bound by this code of self-righteousness. If it were to be believable, it would read:
“Just like most other multinationals operating in Australia, our aim is to rip out every cent we can to our offshore associates while burnishing our PR image and claiming as much welfare from the government as we possibly can. Our only ethic is self-enrichment and pushing the envelope as far as our lawyers permit us.”
Sanofi enjoyed subsidies of $354 million from the taxpayer-funded PBS in 2015/2016, or $41 per script. That same year, it notched up sales of $764 million and paid a measly $95,000 in income tax. Its gross margin was 35 per cent of revenue, its marketing expense $149 million, admin expenses $91.5 million, finance costs $51 million and employee benefits expense $92 million.
The main gameplan, and indeed that of its peers, is to bulk up costs in Australia and drive down profits so profits head offshore.
One of the ruses it deploys to bring this outcome is bouncing its boxes around the world. We should give them the benefit of the doubt and assume they don’t just invoice but actually, physically bounce them.
At the Senate Inquiry into Corporate Tax Avoidance in 2015, Sanofi executives told the Committee they did not know how much tax they paid in the previous year. Was tax expense $8.7 million?
The question was taken on notice and, when it came back, it was revealed income tax due was just $3.4 million after amortisation of brand names and $10.1 million in R&D tax credits.
Little tubes and boxes of pills are not like live cattle exports. They are not big things which need to be tended and watered. Nonetheless, Sanofi – again in responding to questions on notice – revealed they bounced their little boxes about on a world tour before they got to Australia.
The biggest seller in 2014 was Lantus Solostar 5 (LS5), representing some 89 per cent of total Lantus sales (Lantus is Sanofi’s number one product. How did this product get to Australia?
“Financial flows from Germany to Australia are as follows: 1) Sanofi Germany sells LS5 to a French Sanofi affiliate acting as a regional logistic hub for Europe (French hub); 2) French hub sells LS5 to Sanofi Singapore acting as a regional logistic hub for the Asia and Pacific region (Singapore hub). 3) Singapore hub sells LS5 to Sanofi-Aventis Australia Pty Ltd (SAA) that acts as a distributor of Lantus in Australia.” Sanofi failed to reveal the cost of its French hub but admitted the profit margin the Singapore hub received in 2014 on the LS5 units sold to Australia was “about 1.3 per cent of its LS5 sales to Australia”. That’s sales, not profit mind you, and that’s roughly equivalent – just the Singapore leg – to how much tax this company has, on average, paid the Commonwealth over the past nine years.
Singapore, as is so often the case, is nabbing its cut of the Australian taxpayer and consumer dollar thanks to an artificial construct designed to scive out of tax.
It is not even in the same stratosphere of “marketing expenses” though, which accounted for a gargantuan 18 per cent of revenues over the past nine years to 2016.
In 2008, Sanofi paid $35 million or 5 per cent of its revenues as income tax. At their current rate, it would take another four years, or nine years in total, before Sanofi cracks the $35 million mark again. This is no accident. Sanofi’s quinquennial of tax avoidance has been planned and executed with military precision.
Around 2006, Sanofi knew its stellar pharmaceutical product Lantus, used by insulin dependent diabetics, was set to deliver the company big profits in Australia. Sanofi summoned its cuff-linked buccaneers from the legal and accounting fraternity and set about pulling on all those levers of tax avoidance; the very levers which swindle ordinary Australian citizens and lead to things like cuts in government funding and pension freezes.
Creating artificial costs and losses and running down taxable income in Australia is de riguer for the multinational. Sanofi pulled those levers to inoculate the company from Australian income taxes on Lantus sales.
One particularly aromatic transaction occurred in 2008 when Sanofi purchased Symbion CP Holdings, a vitamins and dietary supplements business whose products include Natures Own, Cenovis, Bio-organics, Golden Glow and Microgenics.
Interred in the notes to the financial statements for that year is the admission that the acquisition price was $562 million but goodwill was $354 million and “Brand Intangibles” $195 million.
How did Sanofi finance this acquisition? It borrowed from an associate offshore, Sanofi-Aventis Europe at an interest rate of 8 per cent via a bunch of Redeemable Preference Shares. While Sanofi Australia was paying its associate 8 per cent interest, interest rates in the US were in freefall thanks to the financial crisis. It is not quite in Chevron’s league but it probably could have borrowed at half that rate and saved the Australian company some onerous interest costs.
That is not the game though, the game is wiping out Australia’s profits by whisking interest payments offshore and evidently the French do it with the aplomb of the Americans. Meanwhile, a propos of compliance and obeying les lois de la terre, Sanofi’s financial statements were filed late every one of the past 12 years. Bien joue EY!
To borrow from its mother tongue, Sanofi is a quintessential case of banditisme multinational. And when the profession’s social media celebration #AuditorProud Day rolls around this Thursday, EY should declare, “Excusez-nous”.
Sanofi declined to respond to specific questions for this story, electing to respond with the following general statement:
“Sanofi Australia conducts its business in an ethical, legal and socially responsible manner complying with all applicable tax laws in Australia.
“As a multinational corporation, Sanofi is committed to fully complying with the laws and regulations in force in all countries where the Group operates.
“During the 2016/2017 year the principle activities of the entities within the Group continued to be the business of healthcare products (prescription pharmaceuticals, vaccines, over the counter medicines and vitamin supplements) sale and distribution. We also continue to manufacture vitamins, minerals and supplements locally at our manufacturing plant in Brisbane following a major business acquisition in 2008 to the amount of $ A560M.
“Expenditure in our R&D activities is claimable through the Australia R&D tax regime. In the last few years, we have applied for, and received, a tax benefit from the Australian Taxation Office for projects undertaken in our clinical trials area, as well as the R&D activities undertaken in our Consumer Healthcare business.
“As with all businesses, Sanofi Australia experiences the vagaries of business but at all times it has complied with the tax laws in Australia and made appropriate claims to which it is entitled under those laws.
“All necessary financial documentation has been lodged with the relevant Australian Authorities and the Corporations Act 2001.