Accidental disclosure exposes $ 1 billion tax battle with Bristol Myers

Nearly nine years ago, Bristol Myers Squibb filed papers in Ireland to create a new offshore subsidiary. By shifting profits from Bristol Myers through the subsidiary, the US drug maker could significantly reduce its US tax bill.

Years later, the Internal Revenue Service learned of the arrangement, which it condemned as an “abusive” tax shelter. Bristol Myers’ decision, the IRS concluded, would cheat the United States on about $ 1.4 billion in taxes.

That’s a lot of money, even for a big company like Bristol Myers. But the dispute remained secret. The company, which denies wrongdoing, has not told its investors that the U.S. government is demanding more than $ 1 billion in unpaid taxes. The IRS has not made any public filing on this.

And then, very briefly last spring, the argument became public. It was an accident, and hardly anyone noticed it. The episode provided a fleeting glimpse into something common but rarely seen up close: how multinational corporations, with the help of elite legal and accounting firms and with only a belated IRS review, are avoiding billions. of tax dollars.

Then, in an instant, all traces of the fight – and Bristol Myers’ allegedly abusive arrangement – vanished from public view.

The Tax Shelter

Like most large pharmaceutical companies, Bristol Myers, which is based in New York, is reducing taxes in the United States by holding patent rights to its top-grossing drugs in subsidiaries in low-tax countries. . The result is that the company’s profits are shifted from high tax countries like the United States to countries like Ireland, which has a low corporate tax rate and allows companies to easily attribute profits. to countries without income tax.

(The $ 2 trillion infrastructure plan that the White House unveiled on Wednesday proposed to raise the overseas minimum tax on multinational corporations, which would reduce the attractiveness of such arrangements.)

For the three years prior to 2012, Bristol Myers’ tax rate was around 24%. At the time, the corporate tax rate in the United States was 35%. (It is now 21%.)

The company wanted to pay even less.

In 2012, he turned to PwC, the accounting, consulting and advisory firm, and a large law firm, White & Case, for help launching an elaborate escape strategy. fiscal. PwC had previously served as Bristol Myers’ auditor, but was dismissed in 2006 after an accounting scandal forced Bristol Myers to pay the US government $ 150 million. Now PwC, with a long history of providing Irish tax shelters for multinational companies, has returned to the good graces of Bristol Myers.

The plan was based on a tax write-off known as depreciation. It allows companies to deduct part of the cost of things, such as the value of a patent, from their taxable income over a period of several years. (For physical assets such as office buildings, the process is called depreciation.)

In the United States, Bristol Myers held patent rights to several drugs that it had already written off entirely for tax purposes.

In Ireland, a subsidiary of Bristol Myers held rights to patents which it had not yet fully written off.

This mismatch provided a lucrative opportunity. The company transferred the patent rights from the US and Irish subsidiaries to a new company. With US patents generating income, Irish depreciation deductions were now helping to offset US taxes.

When a company rolls out a complicated new arrangement like this, it will usually seek the imprimatur of law and accountancy firms. If they ensure the legitimacy of the maneuver, it can protect the company from accusations that it has deliberately broken the law.

In the fall of 2012, after the new structure was put in place, Bristol Myers asked PwC and White & Case to review the arrangement. Both companies provided the company with long letters – each over 100 pages long – approving primarily from a legal standpoint.

“Bristol Myers Squibb complies with all applicable tax rules and regulations,” said Megan Morin, spokesperson for the company. “We are working with leading experts in this area and will continue to work with the IRS to resolve this issue.”

A PwC spokeswoman declined to comment. White & Case lawyers and a spokesperson did not respond to a list of questions.

But there were many signs that the IRS would likely have a bad opinion of the arrangement. Months earlier, a federal appeals court sided with the agency after challenging a similar move by General Electric using an offshore subsidiary called Castle Harbor. The IRS has also challenged comparable setups of Merck and Dow Chemical.

The Bristol Myers arrangement “appears to be essentially a copier shelter,” said Karen Burke, professor of tax law at the University of Florida. Since the IRS was already fighting similar large-scale transactions, she said, “Bristol Myers’ behavior appears particularly aggressive and risky.”

The following January, the company announced its 2012 results. Its tax rate had fallen from nearly 25 percent in 2011 to less than 7 percent.

During a call with investors, executives answered repeated questions about the lowering of its tax rate. “Presumably all pharmaceutical companies try to optimize their legal entities to keep their tax rate as low as possible, but your rate is significantly lower than all other companies,” said Tim Anderson, analyst at Sanford C. Bernstein. & Company. “So I wonder why your tax rate might be unique in this regard?”

Charlie Bancroft, the company’s chief financial officer, wouldn’t say so.

The tax savings of over $ 1 billion came at an opportune time: Bristol Myers was in the process of repurchasing $ 6 billion of its own stock, in a bid to raise its share price. As of January 2013, he had spent $ 4.2 billion. The money freed up by the fiscal maneuver was enough to cover most of the rest.

Sloppy writing

It is not clear when IRS agents were first notified of the arrangement. But last spring, the IRS’s office of chief counsel determined it violated a provision in tax law that targets abusive profit-shifting arrangements.

In a 20-page legal analysis, the IRS calculated that the offshore setup was likely to save Bristol Myers up to $ 1.38 billion in federal taxes.

After a complex audit, the IRS often circulates its analyzes to agents across the country in case they encounter similar situations. A redacted version of the report is also made public on the IRS website, cleaned up of basic information like the name of the company.

But when the IRS released its Bristol Myers report last April, it was not properly redacted. With the tools available on most laptops, the redacted parts could be made visible.

The IRS quickly removed the incorrectly redacted version from its website. But Tax Notes, a widely read trade publication, also published the document. When the IRS provided a clean version, Tax Notes removed the original.

An IRS spokesperson declined to comment.

Cara Griffith, managing director of Tax Analysts, the publisher of Tax Notes, said the publication erred “in not posting confidential taxpayer information that was accidentally disclosed by editorial error, to unless they reach a very high threshold of journalistic value. “

Within hours, however, some tax professionals had downloaded the original version from Tax Notes. One of them shared it with the New York Times, which viewed the document without the redactions.

In addition to detailing the offshore structure, the IRS report revealed the role of PwC and White & Case in reviewing the transaction. Although the two companies assessed the arrangement’s compliance with various provisions of the tax law, neither company issued an opinion on whether the transaction violated the only part of the tax law – an anti-abuse provision – which the IRS later argued as invalidating the transaction.

Tax experts said they doubted the omission was inadvertent. The IRS can impose penalties on companies that knowingly circumvent the law. By not addressing the most problematic part of the law, Bristol Myers advisers could have given the company plausible deniability.

The two companies “appear to have carefully defined the issues so that they can write a clear opinion that could potentially provide protection against sanctions,” said Professor Burke.

David Weisbach, a former Treasury Department official who helped draft regulations governing the tax code provision that Bristol Myers is accused of violating, agreed. PwC and White & Case “give you 138 pages of legal jargon that doesn’t address the core issue of the transaction,” he said. “But you can show the IRS that you got this big op-ed, so it has to be stylish and good.”

The current state of the tax dispute is unclear. Similar disputes have spent years going through the IRS appeals process before reaching settlements. Companies often agree to pay a small fraction of what the IRS claimed.

“There’s a good chance a case like this can be settled for as little as 30 percent” of the amount in dispute, said Bryan Skarlatos, tax lawyer at Kostelanetz & Fink.

In this case, the allegedly abusive tax shelter would have saved Bristol Myers nearly $ 1 billion.