Shire structure puts spotlight on tax

Ireland’s largest drug company has come out fighting following allegations that, with its tax adviser PricewaterhouseCoopers, it has engaged in tax avoidance on an industrial scale – as alleged by the public accounts committee of the UK parliament.

Both sides are distinctly touchy on the issue. Shire is Irish in name only, having relocated its corporate domicile here in 2008 when the then Labour government in London looked at increasing the tax burden on business. While it does have an operational presence in the State, it still functions mainly out of its old English headquarters, is registered in Jersey and does most of its business in specialty pharma and the treatment of psychotic conditions in the United States.

That structure, the circumstances of its departure from the UK for tax purposes and the effective tax that it has been paying all rankle with Britain's PAC and its chairwoman Labour MP Margaret Hodge.

Last week, it emerged that Shire’s advisers had determined that the $1.635 billion (€1.44 billion) break fee it received from US rival Abbvie following the collapse of their proposed merger last year was not subject to tax in Ireland – and therefore unlikely to be subject to any significant taxation anywhere.

The Irish Revenue has still to sign off on such an interpretation but if it does, the company will effectively have avoided a tax bill of €480 million.

For its part, Shire insists it has nothing to hide, with chief executive Flemming Ornskov arguing it was simply running the company as efficiently as possible to maximise returns for shareholders and increase investment in new medicines.

Ornskov has been instrumental in building a strong specialty pharma pipeline at a business previously better known for growth by acquisition rather than by innovation. And developing therapies in that space is undoubtedly expensive – a bone of contention with governments and other payers when drug companies are setting prices for some of their breakthrough therapies.

Still, against the background of its very convoluted corporate structure, the fact that Shire paid taxes of only $56.1 million last year on revenues of over $6 billion under US general accepted accounting principles (GAAP) is bound to raise eyebrows. That’s a tax rate of less than 2 per cent.

With the international political climate increasingly inimical to aggressive tax planning, the company can hardly be surprised that Revenue will want to look very closely at an arrangement that could allow the company to sidestep a €480 million liability.