Drug companies won’t deny Australia is being ‘ripped off’ on medicines

Multinational pharmaceutical companies are unable to assure Australians they are not being “ripped off” on the price of medicines as a result of their complex global supply chains.

The Australian heads of nine of the biggest global drug suppliers were forced into the embarrassing admission on Tuesday after backing themselves into a corner by insisting they have no idea what their own sister companies in other countries pay to import the same medicines.

At a fiery public hearing of the Senate’s inquiry into corporate tax avoidance, evidence emerged of the same “double Dutch” corporate structures used by tech companies.

Liberal senator Sean Edwards accused Pfizer, which received more than $700 million in public money last year in sales through the Pharmaceutical Benefits Scheme, of “fabricating” its cost structure to benefit its United States-based parent reduce its tax bill in Australia.

Pfizer, which had sales of $1.4 billion in 2014 but paid just $21 million in company tax, claims its “cost of sales” is more than three-and-a-half times higher than in the US. A higher cost of sales erodes profitability and keeps a company’s tax burden lower.

Pfizer managing director David Gallagher said he didn’t know what any other Pfizer subsidiary paid for drugs manufactured by the company in Ireland and declined repeated requests to explain the “arm’s length” process that determined intra-company transactions, known as “transfer pricing”.

His answers left senators on the committee livid. Senator Edwards said: “May I say Mr Gallagher, this isn’t going too well for you. This is starting to look like something that’s being fabricated to minimise your tax … that’s not going to pass the pub test.”

Committee chairman Sam Dastyari asked the heads of Pfizer, AstraZeneca and GlaxoSmithKline: “As the CEOs of three of Australia’s biggest pharmaceutical companies, you have no idea what drugs cost in other jurisdictions? You can’t tell us whether we’re getting ripped off?”

Later, Tax Commissioner Chris Jordan said the inquiry had witnessed “inconsistency” from the pharmaceutical representatives and he said new tax rules from January 1 this year made it compulsory for company heads to understand how transfer prices were formulated.

“Their answers were consistent with the law as it was last year and they are going to have to lift their game,” he said

On the one hand, the pharmaceutical companies had insisted they were adhering to OECD guidelines and arm’s length principles on transfer pricing, he said, but on the other they “seem to have no idea” about how prices are set by their head offices.

“We could look at that as somewhat of an inconsistency,” he told senators.

Australian Tax Office deputy commissioner Mark Konza, a former auditor of pharmaceutical companies, said the issue of tax paid by the industry was “endemic” and had been a problem for decades. “It just doesn’t go away,” he said.

But Louise Weingrod, vice-president global taxation for Johnson & Johnson did shed some light on transfer pricing.

Her evidence indicated that the arm’s length system approved by the Tax Office was actually based on a minimum level of profitability for “distributor markets” like Australia where no manufacturing and research and development takes place by J&J worldwide.

She said import prices were based on keeping profitability as a percentage of revenue “within the same range” across different countries.

Laurence McAllister, managing director of Sanofi, which has its headquarters in France, insisted that Australia is getting “incredibly good value of medicines” under the current arrangements.