Mylan CEO, Heather Bresh, called before House Oversight Committee

EpiPen maker, Mylan, called before House Oversight Committee to explain 400% price increase.

In the news recently, Mylan CEO, Heather Bresh, was called before the House Oversight Committee to discuss Mylan’s increase in prices of the EpiPen.  In case you missed it, EpiPen prices have risen about 400% with a two pack of the lifesaving injection drug at a retail cost of $600.

According to CNN, Ms. Bresh’s testimony before the House Oversight Committee will state that Mylan only makes about $50 for each $300 pen.  Money magazine also details how Mylan is trying to get EpiPen on the Preventative Medicines list, which would allow patients to receive EpiPen will little or no out-of-pocket costs, and so that insurance would have to pick up the cost.

What gets lost in the outrage over a drug price increase, is why the huge increase?  EpiPen has been around a long time, and the process to create EpiPen hasn’t changed for some time, so why the huge increase, and why is Mylan only getting $50 profit from a $300 item. 

One theory is Mylan has been increasing the demand of EpiPen through effective marketing practices.  See this Bloomberg article.  Another often not discussed aspect is transfer pricing, inversions and booking profits offshore.  As stated in the 10-K for Mylan for tax year ended (tye) December 31, 2014, Mylan inverted from a Pennsylvania Company to a Netherlands company with its principal executive offices in Potters Bar, UK. 

As previously discussed in this Blog, one of the key tools U.S. Multinational Corporations (USMNCs) utilize to lower its tax rate is to invert the corporate headquarters to a lower tax jurisdiction. 

Also as previously discussed in this Blog, a second tool used by USMNCs is transfer pricing.  In this case, as stated in this Time article, it costs Mylan about $30 to make each dose of EpiPen.  Mylan likely has the drug filled in the Netherlands or another tax favorable jurisdiction, and then re-sells the drug at the $600 price for a EpiPen 2 pack back to U.S. distributors, thereby booking the costs in the tax favorable jurisdiction. See this primer on transfer pricing.

By using this method (transfer pricing) USMNCs can claim a lower tax rate than the applicable 35% tax rate.  While I am not saying that Mylan utilizes transfer pricing, one indicator that Mylan may be utilizing transfer pricing is in its 10K, Mylan states that for 2014, Mylan only pays an effective tax rate of 4.2%.  (FYI, the statutory rate is 35% for corporations in the United States.)  Mylan also lists on is 10K that it approximately $693 million permanently reinvested in its foreign subsidiaries, which is how companies disguise on their 10K amounts they are holding offshore to avoid taxation in the U.S.

So this begs the question, why can Congress call Ms. Bresh to appear before the House Oversight Committee to discuss pricing, but the IRS can’t call Mylan to conduct an analysis of its transfer pricing or its inversion practice?

If you know of a corporation undervaluing assets in its transfer pricing models, contact our firm to discuss filing a tax whistleblower claim.  IRS will pay an award between 15-30% of collected proceeds (tax, penalties, and interest) to whistleblowers who provide substantial and credible information used by the IRS in prosecuting the alleged tax violators.

Facebook and its Transfer Pricing Issues

In addition to Google having European leaders questioning the validity of its transfer pricing models and shifting profits from France, Facebook is also having IRS inquiries about its transfer pricing practices.

As noted in this Reuters' article, the IRS is looking at whether Facebook transferred its intangibles to its Irish subsidiary at too low of a price.  As stated in the Reuter's article, by raising the transfer price of the intangible to the Irish subsidiary, Facebook could have increased taxable profits in the US. The article quotes the complaint which alleges that Facebook may have understated the intangible by billions of dollars.  Facebook was advised in the transaction by Ernst & Young.

Recent news also indicated that Facebook has hired Baker & McKenzie to fight the IRS in this transfer pricing dispute.  As you will recall, Baker & McKenzie just won a major victory against the IRS in the Medtronic case.

In Medtronic, IRS challenged the profit split calculation paid to Medtronic's Puerto Rican subsidiary, by stating that the Puerto Rican subsidiary was nothing more than a contract manufacturer for Medtronic.  Medtronic claimed that its Puerto Rican subsidiary was instrumental in its efforts because it oversaw the quality of Medtronic's products.  The Court determined that IRS's method (valuing the Puerto Rican subsidiary as solely a contract manufacturer) was arbitrary and capricious and therefore IRS abused its discretion. However, the Court didn't stop there, it also stated that Medtronic's proposed model was a better approach (Medtronic chose a comparable transaction involving a competitor and argued that it was actually due a refund), but adjusted the model to better match Medtronic's business.  The Court ended up with the rate the parties had previously agreed to in prior settlements of their transfer pricing dispute.  See these articles: Wall Street Journal and BNA.

While it is refreshing to see that the IRS is challenging US Multinational Corporations at their use of transfer pricing, the question remains whether these challenges will be upheld.  See prior blogs regarding transfer pricing, inversions and earnings stripping.

If you know of a corporation undervaluing assets in its transfer pricing models, contact our firm to discuss filing a tax whistleblower claim.  IRS will pay an award between 15-30% of collected proceeds (tax, penalties, and interest) to whistleblowers who provide substantial and credible information used by the IRS in prosecuting the alleged tax violators.

Sports and Taxes Part 2: Update on Messi trial and Kevin Durant's decision to take less money by signing with the Warriors

First:  as noted in a previous post, Lionel Messi, Argentinian soccer star, and his father ("Messis") were on trial for tax fraud.  Now, as reported in Sports Illustrated, the Messis have been sentenced to 21 months in prison for being found guilty of three counts of tax fraud.  However, because Spain suspends sentences for first time offenders if the sentence is less than two years, the Messis will not serve time in jail.  Instead Messi and his father will have to pay a fine in the amount of € 1.7 million and € 1.3 million, respectively.

The Court determined that the Messis evaded paying more than € 4 million in taxes on Lionel Messi's image rights between 2007-2009 by sending income through Uruguay, Switzerland and Belize to minimize taxes.

Kevin Durant

Second: as reported in this SI artcle, NBA superstar Kevin Durant chose the Golden State Warriors and decided to take less money than by staying with Oklahoma City Thunder, or any other suitor.  Why did Durant take less money? Simple answer, state income taxes.  Using the models in the SI article which makes certain assumptions, Durrant would pay $31 million in state income taxes (to California) compared with $0 state income taxes had he signed with the San Antonio Spurs (to Texas) or Miami Heat (to Florida), and compared with $14 million in state income taxes had he re-signed with the Oklahoma City Thunder (to Oklahoma). So why did Durrant choose to take less money? As stated in this SI article, he wanted a more free flowing (ball moving) offense and was frustrated with recurring issues with a now former teammate (Russell Westbrook).

Why are these cases important/interesting?  In the first case (Messis), tax avoidance is not tax evasion, if done properly.  In the second case (Durant), personal desire trumped tax consequences.

MESSI

In the first case, it is interesting that the Messis undertook what in the tax world is known as transfer pricing with the intangible (Messi's image and likeness) and tried, unsuccessfully, to transfer the intangible between Uruguay, Switzerland, and Belize.  This same concept has been utilized by very large US multinational corporations (i.e. Apple, Google, Microsoft, Caterpillar, Medtronic, and others) to transfer their intellectual property ("intangible") to low tax jurisdictions (Puerto Rico, Ireland, Netherlands, Switzerland, etc.) to lower their bills in the U.S.

The simple question is why did it work for Apple, etc. and not Messi? One answer may be that a person's image and likeness are not separable from an individual, whereas the intangibles related to non-living things (i.e. iphones, search data, source code, heavy equipment, medical devices, etc.) can be separated from the individual. Or another possibility is that the U.S. is not attacking transfer pricing with U.S. multinational corporations with as much zeal as Spain.

DURANT

The Durant case is interesting because Kevin Durant chose to pay more state taxes but would be in the type of offense he craved instead of staying in OKC or moving to a tax favorable jurisdiction.  So this raises the question of whether tax motivates people to make a decision or whether it is just an afterthought.  For more information about state taxes and athletes see this Forbes article.  See also this article through Fansided about state taxes and athletes.

If you have specific/credible information about individuals or corporations avoiding the payment of tax through transfer pricing or other methods, you can get involved in preventing/limiting the tax avoidance by filing an IRS tax whistleblower claim.  The IRS pays an award between 15% to 30% of the tax collected to a whistleblower that provides specific and credible information about the taxpayer’s avoidance of tax.   Contact our firm if you want to discuss filing a tax whistleblower claim.