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Pharma’s tax dodge

September 21, 2018

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BIG pharma often cites two factors to justify its high drug prices: large investments in research and development, and the high incidence of taxes. Neither of these is completely accurate. Analysing the available financial disclosures of just four multinational pharmaceutical companies, not only did Oxfam find that these firms spend far more on lobbying and marketing than R&D, it also claimed that they could be depriving seven developing countries, including Pakistan, of an estimated total of $112m in tax underpayment. Based on its limited access to financial disclosures of the firms’ operations in Pakistan, it alleged that one corporation alone may be underpaying the government to the tune of $1.7m annually. The firms’ representatives have been quick to state that they follow all procedures and laws of the countries they operate in (which may be technically true) but Oxfam points to a deeper issue in which both the industry and governments are complicit: the exploitation of a dysfunctional international tax system, riddled with loopholes, through practices of tax dodging, price gouging and influence peddling. Indeed, it is difficult to reconcile a pattern in which these firms, with annual global ‘superprofits’ of up to 30pc, reported 5-7pc profits in countries with standard corporate tax rates, versus much higher profits in low-tax jurisdictions with smaller markets for their drugs.

The ultimate losers in this equation are those living in extreme poverty, without access to essential life-saving drugs and vaccinations ie public health provisions that this lost revenue could have accounted for. Such firms may find immunity in legal grey areas, but the ethical implication is stark for an industry that controls the fate of millions of lives. With Pakistan’s poor regulatory framework, there is a high probability of multinationals distorting taxable income declarations through under- and over-invoicing of transfer prices. What is certain is that more transparency is needed. Closer scrutiny of their financial declarations is essential to uncovering potentially dodgy practices, including the extent to which profits may be being shifted. But though multinationals constitute only a fraction of the local drug manufacturing industry, they wield considerable clout. Given the government’s capitulation to special interest groups in its recently announced fiscal measures, can it withstand the pressure to enforce stricter financial monitoring of multinationals and ensure they are paying their fair share? A genuine commitment to accountability — the lynchpin of the PTI’s electoral campaign — would demand as much.

Published in Dawn, September 21st, 2018