Drugs giant set for legal showdown with taxman

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AstraZeneca, the
FTSE 100 UK drug-maker, has said it expects to settle a long-running tax dispute
over transfer pricing with HM Revenue and Customs in a special tribunal, despite
speculation that it may reach a private settlement. The case, which, has been
deferred until April 2010, is likely to set a precedent for other multinationals
which transfer goods and services between countries.

In November, the taxman is believed to have imposed an additional claim on
unpaid tax on the profits of foreign subsidiaries at AstraZeneca – under
controlled foreign companies rules.

The case, to be heard by the Special Commissioners, the appeals body for UK
tax cases and an executive agency, has been delayed to allow AstraZeneca time to
mount a defence against the claim.

An AstraZeneca spokesman said: ‘We have not ruled out a negotiated settlement
but we now consider it likely that litigation will be necessary to acheive
resolution on this matter.’

Experts believe the case could set a precedent for future disputes as the
taxman clamps down on billions of pounds it claims are lost to large companies
diverting profits to lower-tax jurisdictions when transferring goods and
services between countries.

However, tax experts who spoke to Accountancy Age predicted that
HMRC and AstraZeneca may try to settle the case out of court due to its
increasing complexity and the amount of money at stake.

One source, who asked not to be named, said: ‘There’s a high chance of them
settling the dispute out of court… there’s no guaranteed winner.’

AstraZeneca has set aside around $1.3bn (£890m) for claims over transfer
pricing tax owed worldwide, but it is unclear how much tax HMRC claims that the
drug maker owes.

Both parties declined to reveal the amount attributable to the UK.

It is thought that high-profile commissioners John Avery Jones and Howard
Nowlan are hearing the case, while Graham Aaronson QC, one of the country’s top
tax barristers, is representing AstraZeneca.

Transfer pricing tax disputes have hit the profits of pharmaceutical
companies before. In 2006, GlaxoSmithKline, the world’s second-biggest drugs
manufacturer, paid a fine of $3.4bn (£2.3bn) to the US Internal Revenue Service
after a dispute over its transfer pricing arrangements which dated back to the

But the rules on transfer pricing in the UK are less clear. Another source
said that while there was guidance on transfer pricing, there was currently no
case law governing the issue. This particular case will set a precedent and
‘HMRC isn’t expected to go lightly’, the source said.

In its 2007 results AstraZeneca outlined its total potential exposure to
transfer pricing tax — dating back to 1996 — worldwide.

It says worldwide exposure to transfer pricing audits was $1.3bn – an
increase of $327m due to ‘a number of new audits, revisions of estimates
relating to existing audits, offset by a number of negotiated settlements’.

AstraZeneca added that the ‘potential for reasonably possible additional
losses’ above and beyond the amount provided to be up to $400m, taking the
potential tax liability to in excess of $1.9bn (£1.3bn).

An HMRC spokeswoman said: ‘Unfortunately as this case is ongoing we are
unable to discuss any aspect of it due to taxpayer confidentiality. Until the
hearing has taken place we are unable to talk about this at all.’

What is transfer pricing?

Multinational companies need to exchange both tangible goods and services and
intellectual property (IP) between subsidiaries.

Applying a rate of exchange to this is referred to as transfer pricing, which
is thought to account for more than half of all world trade.

The onus is on the company to set the price at ‘arms-length’, meaning that
the price should reflect the standard market rate.

But putting a price tag on intellectual property assets, such as research and
development and computer technology, can be difficult as market comparisons are
not readily made.

Because the transfer price set by a company will affect the allocation of
total profits throughout subsidiaries, tax authorities pay particularly close
attention to any profits that are diverted to lower-tax subsidiaries within a
company. That would mean the company pays less corporation tax.

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