Shire, the FTSE 100 drug firm, enjoyed an effective tax rate of less than 2% last year despite the majority of its sales coming from pills prescribed in America, which is one of the jurisdictions with the highest corporation tax in the world.
The headline corporate income tax rate in the US is 35%, but Shire – like many global drugs and technology groups– has for years managed to maintain a much lower effective tax rate, thanks in large part to complex tax planning. Last November Shire’s activities in Luxembourg featured in a tax investigation by the Guardian. The pharmaceutical group, which is best known for its pill treating ADHD, sells few of its products in tiny European state, where it has just two employees.
The investigation – part of a wider look at a cache of leaked tax rulings granted to multinationals – found that one Shire financing unit in Luxembourg had received more than $1.9bn (£1.4bn) in interest income from other group companies in the last five years. Over four of those years it paid corporation tax of less than $2m, despite minimal overheads.
The key to unlocking these huge tax savings was a complex corporate structure involving a second Shire internal financing company, based in Ireland, which lends money to its own branch office in Luxembourg – an arrangement that led to different tax outcomes in the two countries.
On Wednesday Shire, which switched its tax residency from the UK to Ireland in 2008, reported pretax profits of $3.34bn for 2014, but tax of just $56.1m, giving an effective tax rate of 1.7%. The tax rate for the previous year had been 16.4%.
The company explained that the exceptional drop in 2014 was in large part owing to the oneoff impact of winning a tax dispute with the Canadian tax authorities last summer. This resulted in the group receiving a repayment of $417m.
Stripping out this and other one-off factors, the group’s effective tax rate would have been 17%, Shire said.
Its head of tax, Fearghas Carruthers, was summoned to appear before parliament’s public accounts committee last December after the Guardian’s investigation. Of Shire’s 16.4% tax rate for 2013, he told MPs the figure was “an anomaly”. The truer figure would be 22%.
The committee published its findings on Shire’s Luxembourg affairs last week. It concluded: “Multinational companies do not need to conduct any business of substance in the countries where they shift profits to in order to avoid tax. Shire has arranged its affairs so that interest payments on intra-company loans reduce significantly its overall tax liabilities.
“While Shire has external borrowings of around £800m, it makes interest payments on intra-company loans worth £10bn to a company it has established in Luxembourg. The effect is to shift profits from other countries, where tax rates are higher, to Luxembourg.
“The ‘substance’ of Shire’s business in Luxembourg, used to justify these arrangements, consists of two people out of the 5,600 staff the company employs globally.”
