Breaking Bad: the tax antics of drug giant Abbvie

by | Jul 3, 2017 | Economy & Markets, Finance & Tax

* Australians are paying four-times too much for drugs

* Big Pharma is subsidised by taxpayers on the way in to Australia via the $10 billion Pharmaceutical Benefits Scheme (PBS).

* On the way out, Big Pharma helps itself to further taxpayer subsidy by “transfer pricing”, shifting profits offshore.

Kicking off a ten-company investigation into the local offshoots of Big Pharma in Australia, we start with Abbvie. They used to call it Abbott. This is the seventh largest drug company in the world and manufactures the world’s most lucrative drug Humira, an arthritis treatment whose sales are tipped to surpass $US15 billion this year.

Readers can be forgiven for speculating that, as Abbvie is a US multinational drug company, it will be up to its neck in transfer pricing. It is a reliable assumption and, once again, a correct assumption.

The giveaway is that the gross profit which AbbVie records in the US is twice as fat as the gross profit it discloses in Australia. It achieves this by selling Australia drugs at higher prices: eliminating profits here in order to record higher profits elsewhere.

Why would they do this? The bosses who run the show globally don’t want to make a profit here – that would mean paying tax to the Australian government – so they dump their costs into Australia and rake their profits offshore.

The telling metric is to compare gross profit margin in the US with gross profit margin in Australia. For every one dollar it earns selling drugs in Australia, Abbvie makes a profit of 34c. In the US, that gross profit is 77c in the dollar. That was last year, 2016.

The year before, it was even more pronounced: gross profit margin in Australia at 33 per cent, gross profit margin in the US at 80 per cent. And in 2014, it was 29 per cent versus 78 per cent.

This is the profit margin which fires up returns for US shareholders, bolsters executive bonuses, and helps to finance what was a record $US60 million in drug company political donations last year to Washington. It all helps foot the annual lobbying bill too, which has hovered around $US240 million for many years.

It is a grotesque thought, but Australian taxpayers and drug customers are therefore assisting to subsidise donations to Donald J Trump.

Trump is not the worst of it. Hillary Clinton was by far and away the top recipient in 2015-2016 with $US2.1 million in what are euphemistically labelled “contributions” from Big Pharma alone.

Besides campaign finance the political dollars spent by the sector are spent fighting for things like longer patent protections to keep drug prices high.

Over the four years since 2012/2013 since Abbvie Ltd was spun out of Abbott and incorporated here, the company has booked tax expense of just 1.2 per cent on $1.3 billion in revenue. The consistently suspicious disparity in gross margins have been matched by consistently low income tax payments.

Last year’s effort was a typical performance. It showed a little tax expense – $2.9 million on $341 million in sales and $15.5 million profit. Well shy of the statutory 30 per cent corporate income rate, but not that this really matters anyway; the profit has been manipulated lower.

One intriguing aspect of the accounting machinations, signed off Big Four architect of global tax avoidance EY, is that Abbvie has nothing in the way of long-term debts. Year in, year out however, it executes a massive short-term debt shuffle.

Mexican drug lord Joaquin “El Chapo” Guzman, would be proud of this accounting treatment. Cash in, cash out, fast, no explanation for authorities, just buenos dias and hasta la vista.

Big pharma shuffles the tax pill

Last year, Abbvie recorded “proceeds from borrowings” of $841 million and “repayment of borrowings” of $901 million. “Current” borrowings, short-term borrowings, not long-term. It happens every year, the numbers grow every year and it looks like a massive money-laundering operation.

One can only speculate these short term loans come from related parties. The skimpy “Special Purpose” financial reports don’t reveal this. What is the economic rationale then of this short-term shuffle? Abbvie doesn’t have much in the way of assets: some $203 million all up. Oodles of “goodwill”. Property, plant and equipment is a mere $5 million.

Cost of sales is just $200 million, so why are they borrowing $840 million and paying it back in the same year? What is the point of this debt? Who is it owed to? We have put these and other questions to the spokespeople for El Chapo, sorry Abbvie, and will add to the story in the remote event of an answer.

Another gem is that Abbvie has issued $23 million in share capital – apparently to its overseas parent. Then they bought the business in Australia for zip and still recognised $34 million in goodwill on the balance sheet and booked a $30 million gain to retained earnings. How is possible to purchase goodwill of $34 million when you haven’t paid anything for it in your zero-dollar transaction?

This is the kind of ribald accounting which the Big Four and their multinational clients can get away with – thanks to slapdash Special Purpose reports.

Standards would be higher of course, if regulators insisted on it, if the Australian Accounting Standards Board (AASB is stacked by Big Four types) did its job, and if EY, PwC, KPMG and Deloitte performed their audit roles with integrity. Sadly, they are just great big tax avoidance facilitators.

There are a few other items of interest in the Abbvie accounts. According to its Directors’ Report, Abbvie was incorporated in August 2012 but ASIC records show March 2012. They have been “breaking bad” for some time. Before their more recent accounting chicanery in Australia, they tried to pull off an “inversion” in the US, that is, sneakily shift domicile offshore to skive out of paying tax.

An inversion is therefore simply a robbery of a government. Where once, outlaws robbed governments by holding up stagecoaches, the biggest robberies are now pulled off by accountants.

In this case, the US entity (Abbvie) was to have conveniently been “acquired” by an overseas company (UK giant Shire). When its headquarters shifted to Britain, Abbvie would have paid less tax. It whined about being treated badly by the White House when the deal got canned.

GetUp and the Tax Justice Network have sponsored to undertake a series of investigations into multinational tax avoidance.

You can follow Michael on Twitter @MichaelWestBiz.

Michael West established to focus on journalism of high public interest, particularly the rising power of corporations over democracy. Formerly a journalist and editor at Fairfax newspapers and a columnist at News Corp, West was appointed Adjunct Associate Professor at the University of Sydney’s School of Social and Political Sciences.

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