What’s this story about a new tax demand on a big pharma company about?
The Revenue Commissioners have given a notice of assessment to Perrigo, a pharma giant with its headquarters in Dublin, for €1.64 billion. Perrigo bought an Irish company called Elan in December 2013 and established its headquarters here at the time, ironically in a tax-saving manoeuvre known as a corporate inversion. Earlier that year Elan has sold its stake in a multiple sclerosis drug called Tysabri to a company called Biogen. The tax demand relates to that sale. Perrigo says that the Revenue is wrong and it will fight the case . Apart from the Apple case, it is the biggest tax demand in Irish history and the largest to arise from the Revenue's own investigations.
What is the row about ?
Elan booked the revenue from the sale as trading income - money it earned in the normal course of its business . This meant it was taxable at the corporation profits tax rate of 12.5 per cent . The Revenue say the sale was not a normal part of the company’s trading and so it was liable to pay capital gains at a rate of 33 per cent on the proceeds of what was essentially a once-off transaction . A twist is that Elan used accumulated losses to avoid paying any up-front tax bill at the time on the initial payment from Biogen. Further payments to Elan/Perrigo as part of the deal were due as a share of royalties subsequently, on which tax would have been payable
How is the bill so big?
The fact that Elan used accumulated losses to avoid paying tax on the initial transaction makes the potential bill now much larger. These losses - as they occured as part of Perrigo’s trading – could not be written off against its capital gains tax bill. So Perrigo would face paying a 33 per cent bill on the entire proceeds - or €1.636 billion.
Why is it all happening now?
The development arises from a Revenue audit of the company for 2012-13, after which it approached the company with a finding which it said it wanted to discuss. It then issued the tax demand at the end of November. The company said it felt discussions were still going on at the time. The Revenue had to issue the demand before the end of this year – otherwise the five year period for doing so would have run out. It is not clear why it had not moved on the issue earlier.
What happens next?
The company lodges an appeal which goes to the Tax Appeals Commission in the first place. If it loses there, the company can then take a case to the High Court. So this could all go on for quite some time.
What does this mean for Perrigo?
It is a big issue for the company, which has a market capitalisation of over $7.1 billion . In the quarter to September, it had sales of $1.33 billion (€1.16 billion). The company confirmed the tax demand in a Stock Exchange filing late on Thursday, following a board meeting. The filing was due for issue on Friday, but was published late yesterday after queries from The Irish Times and the publication of an online report on irishtimes.com. It says it is confident of its legal position, That, ultimately, will be for the courts to decide.
