Report: AstraZeneca funnels billions into Dutch tax-avoidance scheme

AstraZeneca's headquarters in London--Courtesy of AstraZeneca

AstraZeneca ($AZN) is not the first company to employ questionable tax-planning strategies, and it certainly won't be the last. But the U.K.-based drugmaker is the latest poster child for tax avoidance. As The Guardian reports, AstraZeneca funneled billions of dollars into the Netherlands to get out of paying corporate taxes back home.

In 2013, AstraZeneca set up a Dutch lending operation and channeled $2.7 billion of internal group loans through its Dutch subsidiaries, charging interest of more than $140 million a year. The company then registered huge tax breaks in the U.K. and the Netherlands through a process known as "double dipping," or claiming a deduction on the same payment twice, according to the Guardian story.

As a result, the company did not pay corporation tax in the U.K. even though it posted global profits of $4.5 billion in 2013 and 2014.

Tax experts told the newspaper that it was difficult to determine exactly how much AstraZeneca will benefit from the Dutch avoidance strategy, because it all depends on how well the company uses its current tax credits. But "(i)t's clear from the AstraZeneca companies' accounts and replies to [the Guardian] that this scheme was designed to generate a U.K. tax advantage," said Richard Brooks, a former U.K. tax inspector and now journalist (as quoted by the newspaper).

But AstraZeneca is standing by its methods. The company told the Guardian that its Dutch setup involved some tax planning, but its main purpose was to finance overseas purchases. And "use of this U.K. government-sponsored regime for tax planning purposes did not produce any tax savings for AstraZeneca," it added, as patent expirations and R&D took a bite out of revenues in 2013 and 2014.

Still, the company set up the Dutch co-op less than 5 months after the U.K. limited its tax department's ability to crack down on tax avoidance by international businesses, the Guardian notes, making it easier for companies to hatch new tax-paying plans and escape government scrutiny.

AstraZeneca is far from the only company using tax-avoidance strategies. Drugmakers such as Shire ($SHPG) and Valeant ($VRX) have recently come under fire for employing similar tactics, funneling money into a foreign structure to enjoy lower tax rates.

In February, a report by the U.K.'s Public Accounts Committee found that Ireland-based Shire situated a few employees and a chunk of its cash in Luxembourg, an arrangement that wasn't much more than "the promotion of tax avoidance on an industrial scale," the report said (as quoted by Reuters). Shire has two people in the country to oversee 7 companies and about $10 billion in loans, paying a tax rate of only 0.0156% on its profits there.

Valeant is also hopping on the bandwagon, using an address in the Luxembourg to cut millions off the tax bills for Salix, which it acquired earlier this year. The already tax-advantaged Canadian pharma lent $16.5 billion from a Luxembourg-based subsidiary to Salix's stateside holding company, allowing Salix to deduct the interest from its U.S. income. If all goes to plan, the practice will result in $562 million in savings by 2020.

- read the Guardian story

Special Report: The top 15 pharma companies by 2014 revenue - AstraZeneca

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