Did BMS set up a subsidiary to avoid paying $1.4B in US taxes? The Senate finance chairman is on the case

Tax avoidance allegations have hovered over major players in the pharmaceutical industry for decades. Some of the biggest names in the business have occasionally faced inquiries or have had to pay up to the Internal Revenue Service (IRS). Now, Bristol Myers Squibb is at the center of a U.S. senator's tax probe.

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In a letter to BMS CEO Giovanni Caforio, Sen. Ron Wyden wrote that he wants to learn more about how the company reduced its tax rate from about 25% in 2010 and 2011 to -6.9% in 2012. The Senator cites reporting from The New York Times to write that BMS used “offshore subsidiaries to allegedly avoid paying as much as $1.4 billion in U.S. taxes” with the help of advisers at PwC and White & Case. Last April, the NYT reported that the IRS found BMS’ tax setup in violation of anti-abuse provisions and was seeking up to $1.38 billion.

In 2012, BMS “developed a sophisticated tax avoidance strategy, where it shifted intellectual property rights for several prescription drugs to a newly created offshore subsidiary to shift untaxed gains and generate amortization deductions,” Wyden wrote on Tuesday.

The senator pointed out that BMS reported $3.8 billion in U.S. earnings before taxes in 2010 and $4.3 billion in 2011. Then in 2012, BMS reported a U.S. pretax loss of $271 million. In the letter, he asked Caforio to explain the “sharp decline” in U.S. pretax earnings.

Wyden also wants to know how outside advisers may have played a role. BMS sought help from PwC and White & Case to “review tax implications” of its setup, Wyden wrote, but the advisers “apparently offered no interpretation as to whether the arrangement would violate longstanding anti-abuse rules in the Internal Revenue Code.

“While the full facts and circumstances of this arrangement are not publicly available, it seems clear that all of the partners involved were related and familiar with the tax attributes of the other partners,” Wyden wrote. “If true, the failure by sophisticated outside advisors like PwC and White & Case to address the anti-abuse rules under § 1.704-3 raises serious questions as to whether such an omission was deliberate.”

As chairman of the Senate Finance Committee, Wyden is setting out to learn more about the company’s 2012 tax setup.

By Jan. 28, the senator wants to know how BMS reduced its tax rate so dramatically and whether it shifted intellectual property rights from “existing entities” in the U.S. and Ireland to a new subsidiary in Ireland to save on taxes. If so, Wyden wants BMS to “explain the economic substance of this decision and whether it was done in a manner that substantially reduced Bristol Myers’s aggregate tax liability.”

Further, the senator asked Caforio whether the NYT report about the IRS $1.38 billion tax bill is accurate and whether BMS has ever disclosed the matter publicly. The senator also asked whether BMS is fighting the IRS or whether it plans to comply with the agency.

A BMS spokesperson said the company “has received the letter and will cooperate with the committee chairman on his request.”

While BMS is at the center of pharma tax questions this time, some of the company’s peers have faced similar allegations and inquiries over the years. In a 2018 report, Oxfam concluded that Pfizer, Johnson & Johnson, Abbott and Merck & Co. avoided a total of $2.3 billion in U.S. taxes per year between 2013 and 2015 by “shifting profits out of countries where they do their business and into tax havens that charge little or no tax.”

In 2018, Reuters reported that AbbVie, the pharma spinoff from Abbott and the marketer of the world’s bestselling drug, Humira, kept lucrative patents in Bermuda, which has no corporate tax. At the time, the news service reported that AbbVie ran a U.S. loss every year since its 2013 spinoff. During the same period, its U.S. sales soared. AbbVie declined to comment to Reuters on its tax setup.

In another high-profile case, Merck in 2007 agreed to pay the IRS $2.3 billion to settle a tax dispute covering the years 1993 to 2001.

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