Bitter pill that comes with having large drugs sector


ANALYSIS:The pharmaceutical industry’s lobbying of the Government demonstrates how multinationals play governments off each other and limit political choices

The nature of the lobbying of Taoiseach Enda Kenny by the pharmaceutical industry, as disclosed in this newspaper during the week, illustrates the power of the industry, and of the multinational sector generally.

The series of letters from senior figures in the world’s largest pharmaceutical companies appeared co-ordinated and included references to meetings the writers had had with the Taoiseach to discuss their concerns.

They also referred to Ireland’s upcoming presidency of the European Union and topics of interest in that regard, including the pricing of drugs in countries that are the subject of troika programmes.

The conflation in the letters of the sector’s commercial objectives with its importance to the Irish economy illustrated how Ireland’s success in attracting multinational investment can affect the role it plays in the globalised world.

Because globalisation has raced ahead of political control, multinationals play countries off each other, seeking concessions everywhere they go. Governments, unless they can agree regional or global measures that reassert their power, are hugely exposed.

In his letter of February 23rd, 2012, to the Taoiseach, Miles D White, chairman and chief executive of Abbott Laboratories in Illinois, directly linked inward investment and the price his company gets paid by the State for the drugs it supplies.

“In common with other pharmaceutical multinational organisations, we find it difficult to reconcile a policy of pursuing inward manufacturing investment with an attempt to drive medicine prices to among the lowest in the European Union,” he wrote.

The price paid by a government for pharmaceuticals is referenced according to the prices paid by other governments, with the system being organised into “baskets” of countries whose prices are linked.

White’s concern was not so much with his company’s profits from sales here as with the effect any drop in Irish prices would have in other, larger markets.

“International price-referencing results in pricing in Ireland having a knock-on effect on the pricing of medicines in 11 other European countries and up to an additional 37 countries worldwide,” he wrote.

“Driving down the price of medicines across such a large number of export markets for the Irish-based pharmaceutical industry could directly jeopardise jobs in Ireland as it will create substantial pressure to cut manufacturing jobs.”

The Irish pharmaceutical sector employs up to 25,000 people directly, and the same number indirectly, and is a major contributor to Irish exports. The pharmaceutical firms that wrote to Enda Kenny warned that Government decisions aimed at reducing its drugs bill could have “unintended consequences”.

It is a strange thing to have a sector lobbying the Taoiseach to help it combat reductions in the price of its products, not just in this country but in 11 others in Europe, and up to 37 worldwide, and while doing so to suggest that a failure to deliver might affect inward investment into Ireland.

Price paid

Ireland’s drug prices are among the highest in the world, with a recent survey finding that costs here are up to 45 per cent higher than they are in Sweden.

As this newspaper’s health correspondent, Paul Cullen, has observed, it is hard to avoid the conclusion that the high cost of drugs in Ireland is part of the price we pay for having a large pharmaceutical sector.

In fact, given the basket arrangement, citizens in 11 other European countries, and 37 worldwide, may be paying the price. It is important to remember that what is at issue is the price paid by governments for pharmaceutical products.

Yet, despite the importance to them of sales funded by government revenues, pharmaceutical companies, as with almost all multinationals, organise their affairs so they direct profits to low-tax jurisdictions.

White’s company, Abbott, is in the process of creating a sister group, Abbvie, which will focus on research-based pharmaceuticals. This year two Irish Abbvie subsidiaries were established, with registered addresses at the offices of Matheson solicitors in Dublin. Also established was Abbvie Ireland NL BV, a Dutch company with an address in Sligo.

The structure looks like one designed to reduce Abbvie’s future tax bills in much the same way that Google, Microsoft, and other multinationals have used Ireland to save themselves fortunes in global corporation tax. A request for a comment from Abbvie on this point yesterday met with no response.

Just this week Bloomberg reported that Google avoided $2 billion in corporation tax in 2011 by way of its international tax structure. That tax structure is centred in Dublin, where two of Google’s key companies are based at the Matheson offices, and use a Dutch company as part of their tax avoidance policies (the so-called Dutch sandwich scheme).

Earlier this year a report for the Senate Permanent Subcommittee on Investigations in Washington disclosed that Microsoft reduced its US corporation tax bill by €1.87 billion in 2011. The saving was achieved mostly through the avoidance of tax on royalty payments between three companies with their registered addresses at the Matheson offices. One of them, Round Island One, is a Bermuda company, despite having its registered office here.

The structure channels non-US profits from around the globe (including Africa) to Bermuda, which does not charge corporation tax.

Revenues lost

About 60 per cent of world trade occurs within multinational companies. An enormous amount of the profit from that trade is ending up in low-tax and offshore jurisdictions. The revenues lost to governments as a result has to be replaced by targeting other sources, including individuals and businesses that do not trade internationally.

In an environment where so many western countries are raising extra taxes and cutting services in an effort to narrow government deficits, the aggressive avoidance measures operated by multinationals are becoming a political issue.

This month the head of the UK’s public accounts committee, Margaret Hodge, described the tax policies of Google, Amazon and Starbucks as “outrageous and an insult to British businesses and individuals who pay their fair share”. Starbucks, stung by reputational damage, offered to voluntarily pay £20 million to the British exchequer.

On the other hand, Google executive chairman Eric Schmidt responded by saying he was “proud” of his company’s tax structures.

Calls for reform of how multinationals are taxed are entering mainstream debate. The issue featured at last month’s meeting of G20 finance ministers in Mexico.

But Ireland, because of its dependence on foreign direct investment, finds itself on the side of the status quo. Likewise, in relation to financial services, the Irish Financial Services Centre complicates Irish policy on banking regulation and the implementation of a financial transaction tax.

A number of the letters sent to Enda Kenny by the pharmaceutical companies quoted his stated ambition to “make Ireland the best small country in the world in which to do business in 2016”.

That ambition is all very well, but having a disposition towards siding with multinational companies as they play countries off one another carries with it the probability of ongoing erosion of the scope to make political decisions.

It is not true that everything comes with a price. But a lot does.

Colm Keena is Public Affairs Correspondent

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