Another day yet another multinational company is accused of paying up less tax than they perhaps ought to. Today it’s Pfizer in the cross hairs. How can a company that has such large sales in a country not owe any tax there? Well, as the company itself says, corporation tax is levied on profits, not revenues.
The basic complaint is here:
One of the largest suppliers of drugs to the NHS escaped paying any tax to the UK Government last year, it has emerged.
Pfizer, the company behind the best-selling drug on the UK market, Lipitor, and impotence drug Viagra, had a turnover of £1.8bn on its sales in the UK last year. But despite its huge business in this country, the accounts of the company’s British-based subsidiary suggest it made an operating loss of £59m in 2011 and £46m in 2010.
Well, if you make a loss then obviously you don’t pay any taxes on the profits you haven’t made. That’s really pretty simple.
Charlie Elphicke, a former tax lawyer and now a Conservative MP who has launched a campaign to end tax avoidance by multinational companies, said HMRC needed to be feared far more by companies.
“What concerns me is that you have a company like Pfizer which has such a large presence in the UK not paying any tax at all. That raises serious questions,” he said. “We need to have an aggressive approach to tax like they have in America where those that evade taxes are prosecuted and those that avoid it face heavy scrutiny.”
I think we can be pretty sure that HMRC does indeed look very closely at those accounts. I’m also reasonably certain that various intellectual property is in one or another low tax hideaway, it certainly used to be true that Viagra for the European market was made in Ireland, where they have a nice low corporate tax rate. You can take such things any way you wish although I would call them simple and straight tax compliance. If you’re obeying the law, as absolutely everyone agrees Pfizer is doing, then you’re tax compliant.
But what raises my ire is this:
Globally, Pfizer made $12.7bn. If its profits margin in the UK had been similar to average, it would have made a pre-tax profit of £347m on its UK earnings – on which it might have been expected to pay tax of 25 per cent.
No, I’m sorry, but you really cannot do that. Specifically you cannot do that with a pharmaceuticals company in the UK. For who is the largest (by far!) purchaser of pharmaceuticals in the UK? Why, that would be the National Health Service, an arm of the government. And that NHS, using the government monopsony power, deliberately and specifically reduces the prices it is willing to pay for pharmaceuticals below their free market price*. The reductions are significant as well, not just a few percent off the US prices.
So, the one thing we know you cannot do is ascribe to Pfizer UK the same general profit margin that Pfizer worldwide makes. Precisely because the government of the UK does not pay the normal price or allow the normal profit margin.
Which makes the complaint all a bit rich really. The government has screwed down the prices so much that the company isn’t making a UK profit. Then there are complaints that they’re not paying tax on the profit they haven’t made. Sorry folks, but you got some of that tax up front, in the lower prices for drugs that you insist upon. And you most certainly cannot have both, both lower than world prices and also profit margins and thus taxes at world wide rates. The two are simply incompatible.