Pharma's tax strategies have captured a lot of attention lately. First, the U.S. government made noises about changing tax rules for overseas profits. Then AstraZeneca settled a transfer-pricing dispute with the U.K. for $783 million, shining a spotlight on one method companies use to move money around. A U.S. court told Schering-Plough it needed to pay taxes on $690 million in repatriated funds. And so on.
Now, the darlings of Big Pharma--emerging markets--are starting to get tricky, tax-wise. Developing countries are cracking down on multinationals' tax-avoidance efforts, an Ernst & Young survey shows, and some are tightening up their rules. "We are seeing increased audit activity and evidence of increased penalties," E&Y partner John Hobster told the Financial Times, "with a particularly marked increase in audits in emerging markets such as China and India."
Here are some numbers: Chinese tax authorities are looking at 30 percent of companies for possible audits, particularly targeting firms with lots of intra-company transactions. Some 12 percent of surveyed companies reported Chinese audits in 2010, compared with four percent in 2007. In India, that percentage grew to 11 percent from six percent.
Indeed, transfer pricing appears to be a major trigger: Two-thirds of the multinationals surveyed said they had undergone an audit related to transfer pricing, compared with 52 percent in 2007. One in five of the audits ended with a penalty, compared with one in 25 in 2005. No wonder tax directors expect transfer pricing to be a top concern over the next two years. And which industry was most worried about transfer pricing? None other than pharma and biotech.