Drug companies dodge $3.8bn in taxes, money needed to fight poverty

 | Short link: http://oxfamapps.org/media/9xsqy

Four of the world’s largest pharmaceutical companies may be dodging taxes to the tune of an estimated $3.8 billion [£3bn], suggests a new report from Oxfam today.

The international agency warned that companies appear to be depriving governments – including the UK and several developing countries – of vital revenue that could be spent on fighting poverty and services for the poorest such as public health care.  

Harmful Side Effects analyses financial disclosures of Abbott, Johnson & Johnson, Merck & Co. Inc, and Pfizer between 2013 and 2015 for 16 countries. 

The data suggests that the companies may be dodging an estimated $112 million [£88m] a year of tax across seven emerging economies and developing countries for which data was available: Chile, Colombia, Ecuador, India, Pakistan, Peru and Thailand. In these countries, where a total of 143 million people live in extreme poverty, $112 million is enough to pay for 10 million girls to be vaccinated against the virus that causes cervical cancer. This kills one woman every two minutes worldwide, the overwhelming majority from poorer countries. 

Tax avoidance hits poor countries harder as they rely twice as much on corporate tax as a proportion of government revenue than rich countries.

The companies appear to be avoiding an estimated $3.7bn [£2.9bn] a year in taxes in nine advanced economies. This includes underpaying around £124 million of tax per year in the UK, where their combined annual revenue averaged over £4bn between 2013 and 2015, and an estimated underpayment of $2.3bn [£1.8bn] per year in the US.  

Rebecca Gowland, Oxfam’s head of inequality, said: “It is an unacceptable irony that pharmaceutical companies are apparently depriving governments of billions in tax revenues that could be invested in healthcare and other measures to tackle poverty. Companies that produce life-saving medicines are depriving governments of money that could be used to save lives.  

“Given the amount of money that public health providers spend on pharmaceutical companies’ medicines, the very least the public can expect is that the companies pay their fair share of tax. Governments should require all companies to publish financial information for every country where they do business, so it is clear if they are paying their dues.”  

Oxfam’s analysis suggests these four companies – makers of vaccines, medicines and household brands like Neutrogena – are shifting profits out of countries where they do their business and into tax havens. The available data reveals average pre-tax profit margins of just six per cent in countries with standard tax rates, compared to 31 per cent in four countries that enable low effective corporate tax rates – Belgium, Ireland, the Netherlands and Singapore. These numbers indicate a strong likelihood of tax avoidance, though not illegal activity. 

Three of the pharmaceutical companies have a presence in UK-linked tax havens – Bermuda, British Virgin Islands, the Cayman Islands and one or more of the Channel Islands – but due to a lack of transparency in these jurisdictions it is not possible to say what impact these have. 

Harmful Side Effects
also outlines how the pharmaceutical industry uses its economic and political influence to shape government policy and sets medicine prices extremely high – often making them unaffordable for cash-strapped public health services and patients. For example, a standard 12-week course of Pfizer’s breast cancer drug Paclitaxel can be produced for $1.16 [91p] yet sells for $276 in the US and £716 in the UK.  

Oxfam is calling for an overhaul of the current research and development model for new drugs, so that it is dictated primarily by public health needs rather than by profits, with greater transparency over costs, clinical trials and pricing.   

The Health Secretary recently criticised the maker of a cystic fibrosis drug for trying to “rip off taxpayers” and “profiteering off the back of the NHS”, and called for big businesses that form the market economy “to be responsible and have a mission of improving people’s lives because without that it is hard to defend.”  

Gowland added: “The medicines made by pharmaceutical companies can transform lives but their tax, pricing and lobbying practices may be preventing many people from getting the health care they desperately need. Companies should adopt more responsible tax and pricing practices to help contribute to reducing poverty and creating a fairer future for all.” 

Around the world, corporate tax avoidance is contributing to inequality. The poorest women are hardest hit when public services they rely on are cut, and pay the price when regressive taxes such as consumption tax are raised to balance the books. Women also bear the burden of providing care for loved ones when health systems fail.  

The UK has shown leadership in the fight against global tax avoidance, including passing legislation in 2016 that would require large multinationals in Britain to publish details of their activity in every country where they operate. Oxfam is calling for the government to implement this, and to consider other policies such as a minimum effective tax rate and extending transparency rules governing company ownership to the crown dependencies as well as the overseas territories.    

Ends  

For more information please contact: Melanie Kramers, mkramers1@oxfam.org.uk / +44 7825 088894  

Notes to editors 

  1. Oxfam initially reviewed financial data on the 10 largest US multinational pharmaceutical companies. Based on the evidence gathered, particularly linking their tax practices with revenue loss in developing countries and taking into account data availability, we selected four companies for more detailed analysis: Abbott, Johnson & Johnson, Merck* and Pfizer. (*Oxfam’s research relates to the US-based pharmaceutical company Merck and Company, Inc., sometimes known as Merck Sharp & Dohme (MSD), not the German-based pharmaceutical company Merck KGaA. )
  2. Oxfam’s research found that the companies appear to be dodging $3.7bn [£2.9bn] in nine rich countries: Australia, Denmark, France, Germany, Italy, New Zealand, Spain, the UK, and the US. 
  3. Oxfam’s methodology is explained in the report in more detail. We used publicly available data on the financial activities of the companies to gauge if their tax payments in a country were aligned with the level of economic activity. In the absence of full information, we used revenue and profits as a proxy for real economic activity. We multiplied the company’s revenues in a country by the global profit margin to estimate profits, assuming uniform profit margins worldwide. While we recognise that margins are inconsistent, we had to assume the opposite for the purposes of
    this analysis. We applied the country’s statutory tax rate to the estimated profits to estimate how much tax would have been owed if profits were not diverted. Finally, we subtracted actual tax paid in that country from estimated tax owed, to calculate the estimated shortfall. We also spoke to current and former executives from top ten pharmaceutical and accounting firms on condition of anonymity, as well as other tax experts. They described carefully designed corporate structures that systematically minimise the amount of profit that stays in developing countries. We also asked the
    companies to check and explain our findings and to provide evidence where they differ with our interpretation. We refer to their responses in our report. 
  4. We calculated the numbers of people living in extreme poverty using the World Bank statistics from 2016, with the exception of India, for which the data is from 2011. To get a more recent figure for India, we instead used a projection of the poverty rate in 2016 produced by the World Data Lab using an econometric model. According to this estimate there were 127,070,997 million people in India living in extreme poverty. 
  5. Oxfam’s research has identified a minimum of 39 countries or territories as tax havens using the EU’s criteria of lack of transparency, unfair taxation and the failure to implement measures agreed at the OECD to curb tax avoidance – as well as a failure to make tax data public, even if they participate in international exchanges of information. 
  6. According to the IMF, corporate tax makes up 16 per cent of government revenue in poor countries – in rich countries it is just 8 per cent. 
  7. Every year 100 million people fall into extreme poverty because of the cost of healthcare, including medicines, according to the World Bank and WHO
  8. The Health Secretary made his comments in an interview with The Times, ‘Drug firms try to rip off taxpayers, says Matt Hancock’, published 8 September.