US tax authorities investigating drug firm

THE US tax authorities are investigating transfer pricing arrangements between Forest Laboratories and its Irish subsidiaries which had a turnover of $2.06 billion (€1.51 billion) last year.

The Irish turnover equals almost two-thirds of the group's global turnover of $3.7 billion.

The US Internal Revenue Service (IRS) has recently served a bill for $206.7 million on the pharmaceutical group for additional corporation tax for the 2002 and 2003 fiscal years. The bill, which is being challenged by Forest Laboratories, was issued after the IRS conducted a review of the group's transfer pricing practices.

The Irish subsidiaries of the group paid just $22.28 million in Irish tax on profits of $809.4 million in the financial year to March 31st, 2008. This is a tax rate of only 2.75 per cent. Corporation tax in Ireland is 12.5 per cent.

The Irish operation paid so little tax because so much of its profit was categorised as accruing from licensing activities that are not subject to tax here. This saved it $76 million in Irish tax. Other factors further reduced the tax bill.

In its recent annual report filed to the Securities and Exchange Commission (SEC) in the US, Forest Laboratories said that if the IRS prevails with its 2002 and 2003 tax bills, it is likely to issue fresh bills for the period since the 2003 fiscal year. Such a development would be "material", according to the report.

The main Irish subsidiary of the group, Forest Laboratories Holdings Ltd, is based in Clonshaugh Business and Technology Park, Coolock, Dubiln. Its most recent accounts, for the period to March 31st, 2008, were submitted recently to the Companies Registration Office in Carlow from an address in Bermuda.

The company and its Irish subsidiaries had an average of 225 employees during the financial year, with the bulk of them working in manufacturing. The accounts state that Forest Laboratories Holdings "is the licence holder to manufacture and distribute certain pharmaceutical products in the US. It in turn sublicences these rights to other subsidiary companies."

The turnover of the Irish operation has been increasing steadily in recent years as has the value of the licences held.

The bulk of the sales involved are of Lexapro, which is used in the treatment of depression, and Namenda, which is used to treat Alzheimers.

Many US multinationals use comparatively low tax jurisdictions such as Ireland to reduce what they call their effective tax rate below the US corporation tax rate, which is 35 per cent.

Forest Laboratories managed to reduce its effective tax rate to 20 per cent in its most recent fiscal year, compared to 21 per cent the previous year. "The effective tax rate for fiscal 2008 was lower compared to fiscal 2007 due primarily to a higher proportion of earnings generated in lower taxed foreign jurisdictions as compared with the United States," the SEC filings state. "Effective tax rates can be affected by ongoing tax audits."

The accounts also state: "The company's effective tax rate . . . is lower than the statutory rate principally as a result of the proportion of earnings generated in lower-taxed foreign jurisdictions . . . These earnings include development and manufacturing income from our operations in Ireland, which operate under tax incentives that currently expire in 2010."

Forest Laboratories Holdings Ltd paid no dividend to its US parent in the 2008 fiscal year.

In 2004 it repatriated €1.05 billion to its US parent so as to avail of a temporary measure introduced by President Bush under which such repatriations were taxed at a rate of only 5.35 per cent.