Unintended disclosure reveals a $ 1 billion tax battle with Bristol Myers

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Accidental disclosure reveals a $ 1 billion tax battle with Bristol Myers

Almost nine years ago, Bristol Myers filed for Squibb in Ireland to set up a new offshore subsidiary. By shifting Bristol Myers’ profits through the subsidiary, the American drug maker could cut its US tax burden significantly.

Years later, the Internal Revenue Service got wind of the deal, which it denounced as an “abusive” tax authority. Bristol Myers’ move, the IRS concluded, would defraud the United States of about $ 1.4 billion in taxes.

That’s a lot of money, even for a big company like Bristol Myers. However, the dispute remained secret. The company, which denies wrongdoing, did not tell its investors that the U.S. government was demanding more than $ 1 billion in unpaid taxes. The IRS has not filed any public records about it.

And then, very briefly last spring, the argument became public. It was an accident and almost nobody noticed. The episode offered a glimpse of something that is common but seldom seen up close: How multinational corporations evade billions in taxes with the help of elite law and accounting firms and belated scrutiny by the IRS.

Then instantly all traces of the struggle – and Bristol Myers’ alleged improper arrangement – vanished from the public eye.

Like most large pharmaceutical companies, New York-based Bristol Myers is cutting its US taxes by holding patent rights for its most lucrative drugs in subsidiaries in low-tax countries. The result is that the company’s profits are shifting from high-tax places like the US to places like Ireland, where the corporate tax rate is low and makes it easy for companies to map profits to non-income tax locales.

(The $ 2 trillion infrastructure plan presented by the White House on Wednesday proposed increasing the minimum tax on overseas multinational corporations, which would make such agreements less attractive.)

In the three years leading up to 2012, Bristol Myers’ tax rate was around 24 percent. The US corporate tax rate at the time was 35 percent. (It’s 21 percent now.)

The company wanted to pay even less.

In 2012, it reached out to PwC, the accounting, advisory and advisory firm, and a major law firm, White & Case, for help in implementing a sophisticated tax avoidance strategy. PwC had previously been Bristol Myers’ auditor but was fired in 2006 after an accounting scandal forced Bristol Myers to pay $ 150 million to the US government. Now PwC has returned to Bristol Myers’ grace with a long history of establishing Irish tax havens for multinational corporations.

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

In the United States, Bristol Myers held patents on several drugs that it had already written off in full for tax reasons.

In Ireland, a Bristol Myers subsidiary owned patents which had not yet been fully written off.

This disparity presented a lucrative opportunity. The company moved the patent rights of the US and Irish subsidiaries to a new company. As the US patents generated revenue, the Irish amortization deductions now helped offset US taxes.

Generally, when a company embarks on a complicated new arrangement like this, it will seek the imprimatur of legal and accounting firms. If they vouch for the legitimacy of the maneuver, it can protect the company from allegations that it has deliberately broken the law.

In the fall of 2012, after the new structure was in place, Bristol Myers asked PwC and White & Case to review the arrangement. Both companies supplied the company with long letters – each more than 100 pages – which were largely apparent from a legal point of view.

“Bristol Myers Squibb complies with all applicable tax laws,” said Megan Morin, a company spokeswoman. “We are working with leading experts in the field and will continue to work with the IRS to resolve this issue.”

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March 31, 2021, 6:27 p.m. ET

A PwC spokeswoman declined to comment. White & Case attorneys and a spokeswoman did not answer a list of questions.

However, there have been numerous indications that the IRS would likely judge the arrangement poorly. A few months earlier, a federal appeals court had joined the agency after challenging a similar maneuver by General Electric using an offshore subsidiary called Castle Harbor. The IRS also denied comparable setups from Merck and Dow Chemical.

The agreement with Bristol Myers “appears to be essentially a copycat home,” said Karen Burke, professor of tax law at the University of Florida. Having already handled similar high profile transactions, the IRS said, “Bristol Myers’ behavior appears to be particularly aggressive and risky.”

The company announced its 2012 results the next January. The tax rate fell from almost 25 percent in 2011 to minus 7 percent.

During a conversation with investors, executives repeatedly asked questions about reducing the tax rate. “Presumably all pharmaceutical companies are trying to optimize their legal entities to keep their tax rate as low as possible, but their tax rate is significantly lower than any other company,” said Tim Anderson, analyst at Sanford C. Bernstein & Company. “So I wonder why your tax rate could be unique in this regard?”

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

The more than $ 1 billion tax savings came at an opportune time: Bristol Myers was in the process of buying back $ 6 billion of its own shares in an effort to boost its share price. By January 2013, it had spent $ 4.2 billion. The money released by the tax maneuver was enough to cover most of the remaining amount.

It is not clear when IRS agents first found out about the agreement. However, by last spring, the IRS chief attorney’s office had found it violated a provision of tax law aimed at abusive profit shifting agreements.

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

After a complex review, the IRS often forwards its analysis to agents nationwide if they encounter similar situations. A revised version of the report will also be posted on the IRS website and will be relieved of basic information such as the company name.

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

The IRS quickly removed the improperly edited version from its website. But Tax Notes, a popular journal, had also published the document. When the IRS made a clean version available, the original Tax Notes were removed.

An IRS spokesman declined to comment.

Cara Griffith, executive director of Tax Analysts, editor of Tax Notes, said the publication made a mistake “because it did not publish sensitive tax information that was accidentally made public through an editorial error, unless it reaches a very high threshold for that Topicality. ”

In the meantime, however, some accountants had downloaded the original version of Tax Notes. One of them reported it to the New York Times, which looked at the document without the editorial staff.

In addition to detailing the offshore structure, the IRS report revealed the role of PwC and White & Case in reviewing the deal. While both companies assessed the agreement’s compliance with various provisions of the tax law, neither company issued an opinion on whether the deal violated the one part of the tax law – an anti-abuse provision – that the IRS later argued, that the transaction is invalid.

Tax experts doubt that the omission was unintentional. The IRS can impose penalties on companies who knowingly circumvent the law. By neglecting the most problematic part of the law, Bristol Myers’ advisors may have given the company a plausible denial.

Both companies “appear to have carefully worked out the issues so that they can produce a clean opinion that may pose a penalty,” said Professor Burke.

David Weisbach, a former Treasury Department official who helped draft the tax laws that Bristol Myers violated, agreed. PwC and White & Case “give you 138 pages of legal language that don’t address the core issue of the transaction,” he said. “But you can show the IRS that you got this big, fat opinion letter, so it has to be chic and good.”

The current state of the tax dispute is not clear. Similar disputes spent years going through the IRS appeals process before settlements came about. Companies often agree to pay a small fraction of the debt owed by the IRS.

“There is a real chance that such a matter will be settled for only 30 percent of the amount in dispute,” said Bryan Skarlatos, tax attorney at Kostelanetz & Fink.

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