Markets

GSK's Alleged $1.9 Billion Tax Dodge Went Against Its Own Ethics Code

By Jim Edwards

Updated on: May 22, 2009 / 12:27 PM EDT / MoneyWatch

If you thought GlaxoSmithKline was a British company with a British corporate headquarters whose American Depositary Receipts traded on the New York Stock Exchange, you're wrong! Turns out GSK is a Swiss company, and its U.S. unit is just a device to dodge taxes, according to the WSJ.

The U.S. government has taken GSK to court, demanding $1.9 billion in taxes owed. It alleges that in the merger of Glaxo-Wellcome and SmithKline Beecham, Glaxo became the U.S. unit of a Swiss-based parent. The newly merged U.S. GlaxoSmithKline then paid tax deductible compensation payments to its Swiss parent, thus reducing its tax bill.

The IRS -- unsurprisingly -- doesn't quite understand how paying money to yourself makes it non-taxable. This battle comes after GSK lost a 2006 tax war and ended up paying $3.4 billion in unpaid taxes.

GSK is not the only corporate tax shirker on the block. Pfizer is lobbying fiercely to get out of the taxes it ought to be paying, according to Reuters:

Obama would tighten tax-code provisions that allow firms to defer paying taxes on profits they make overseas as long as those earnings are plowed back into the foreign subsidiaries.

That portion of his plan has drawn opposition from big multinational firms such as Pfizer Inc (PFE.N) and Oracle Corp (ORCL.O).

Merck and Johnson & Johnson are in on the act, too:

The pharmaceutical industry is one of the biggest beneficiaries of the current law. At Pfizer, for example, overseas tax deferrals cut the company's effective rate by 20.2 percentage points during 2008, making it the single biggest factor in its effective tax rate of 17%.

Merck & Co. cut its effective tax rate by 11.7 percentage points because of its $4.8 billion in such overseas profits last year, according to its annual report.

And Johnson & Johnson 's effective tax rate was 12.4 percentage points lower because of its $4 billion it said was earned and reinvested overseas, primarily in Puerto Rico and Ireland.

Let's put aside the fact that both the U.S. and the U.K. (and, er, Switzerland) are in the midst of gruelling recessions, and that it would be nice if companies stepped up and paid for their share of infrastructure, education and healthcare that societies need to survive.

Rather, the most galling part of the alleged GSK tax scam is that it goes against GSK's own public statements on what it believes its ethical duties are. Here's GSK's ethics statement:

We are committed to creating a strong ethical culture at GSK.
Failure to uphold high standards of ethical conduct carries significant business risk:
* Erosion of trust in GSK and our products including among regulators, doctors and patients * Fines and litigation resulting in serious financial or legal consequences * Damage to GSK's reputation

So, three for three, then!

Side note: Where does that $1.9 billion number come from? The Journal appears to have noticed a line in GSK's 20F form, filed back on March 4, which states:

The Group carried deferred tax provisions and other short-term and non-current provisions of Â£3,813 million at 31st December 2008 (2007 -- Â£2,814 million) in respect of estimated future liabilities, of which Â£1,903 million related to legal and other disputes.

Oddly, that sentence was in the section labelled "Financial position and resources" and not the "Legal proceedings" section, where giant suits are normally listed. I wonder why?

Image by Flickr user smoob, CC