FTSE 100 companies have had to increase the amount they set aside to provide for the costs of ongoing tax disputes and litigation by £139m, taking the total up to £2.39bn over the last year
Among the top global companies, the pharmaceutical sector accounts for 79% of tax litigation provisions, Thomson Reuters has revealed.
The increased amount in provision for tax litigation costs comes amidst ramped up activities from tax departments around the globe who are trying to recover tax under dispute due to multinational companies’ complex tax structures.
Among these are transfer pricing, which can often result in profits in a higher tax jurisdiction being shifted to lower tax jurisdictions. In some cases, the authorities pursue companies for the tax they believed is owed, if they consider the use of transfer pricing has been an artificial arrangement to avoid tax.
Pharmaceutical sector companies in particular use transfer pricing arrangements, leading to closer scrutiny of their tax affairs.
The UK listed pharmaceutical companies made the biggest provisions for tax disputes and litigation in the last year, with the three big UK pharmaceutical companies accounting for 79%, or £1.89bn, of the total FTSE 100 provisions for tax disputes and litigation. That was an increase from £1.68bn in the previous year.
AstraZeneca made the largest provision for tax disputes out of all FTSE 100 companies, increasing its provision from £1.32bn to £1.53bn.
Thomson Reuters head of group’s practical law dispute resolution service, Raichel Hopkinson said that pharmaceutical companies have been at the centre of many of the biggest tax disputes, partly become the revenues that flow from one part of a pharmaceutical business to another are huge – meaning so much potential tax is at stake.
‘Under pressure from governments to recoup more tax, authorities around the world have been adopting much more aggressive methods and interpretations of tax rules to clamp down on what they see as tax avoidance by businesses,’ she said.
Thomson Reuters says that as well as facing investigations into their own affairs financial services companies are increasingly at risk of blockbuster fines where they are seen to have assisted their customers in tax evasion or avoidance.
It cited at least three FTSE 100 financial services groups which have confirmed that they are under investigation by the US Department of Justice in relation to tax evasion by US clients.
Credit Suisse recently agreed to pay a US $2.6bn penalty in relation to possible tax evasion by its US clients.
Precedent and reputation
The success of businesses in tax litigation is not only important in terms of avoiding fines but also because successful tax litigation can see tax payments reduced and provisions released back to the company. For example one FTSE 100 company was able to release back £137m in taxes as a result of a successful resolution of a dispute.
However, Thomson Reuters adds that becoming involved in a lengthy tax dispute in public may also have considerable effects on the company’s reputation and brand.
‘The public’s perception of a company is partly based on whether it is a ‘good citizen’ and that includes being seen to pay a fair amount of tax. Protracted litigation over tax issues may be damaging from a PR perspective. That’s especially an issue for a company that is consumer-facing,’ says Hopkinson.