Invisible Money 3
Any system that treats a Cayman Island subsidiary as a separate entity is just asking to be destroyed. Professor Calvin Johnson, University of Texas Law School
Try Imagining A Place Where It’s Always Safe And Warm
Glaxo Smith Kline, according to their accountant, is "a world leading research-based pharmaceutical company. Headquartered in the UK with operations based in many countries of the world, including the US. GSK Group [has] an estimated seven percent of the world’s pharmaceutical market." That makes them the third biggest pharma in the world.
You may remember the news in July of this year that GSK agreed to pay USD 3 billion in fines for what is called off-label marketing, a practice in which their antidepressants Paxil and Wellbutrin were promoted for unauthorized uses, sexual dysfunction among them, in addition to holding back data and making unsupported safety claims for Avandia, the diabetes drug.
At the time, Deputy Attorney General James Cole called the settlement "unprecendented in size and scope."1
Clearly GSK does not deal in small numbers. In Invisible Money 3 we take a close look at their tax arrangement with the Government of the Grand Duchy of Luxembourg’s Bureau d’imposition. The tax collector.
Price Waterhouse Coopers is a member of the inner circle of world-leading accountants and the GSK Group’s bookkeeper in Luxembourg. As they tell the story, "GSK was formed on 27 December 2000 by the merger between Glaxo Wellcome and Smith Kline Beecham Groups. The Group has been present in Luxembourg since 1999 through the company GSK (International) (Luxembourg) SA, formerly called SB International (Luxembourg) SA."
Luxembourg is the focus of this series of articles, although it is but one of many fiscal paradises around the world. And while the citizens of Switzerland make a brave push for greater banking and tax transparency, Luxembourg tenaciously fends off all attempts at reform. At the same time, the tax avoidance frenzy has invaded the U.S., with states such as Delaware imitating the Cayman Islands in its veiled, indulgent regulation.
Given such secrecy, the only way to know how Luxembourg calculates its treatment of the companies and individuals who park their money there is through whistleblowers within either the government, the company in question or its accountants.
A single document, one of thousands, dated November 11, 2009 and given to Edouard Perrin during the preparation of his documentary Les Petits Secrets des Grandes Entreprises for TV France 2, will suffice to reveal exactly how the game is played. There is little doubt that the money discussed in the tax agreement is now, in October 2012, shuttling back and forth in newer and more ambitious circles. While that is relevant, it is not crucial.. Money, in the long shadow cast by banking deregulation, is constantly on the move and last year’s arrangement is rewritten and new, more complaisant havens are found whenever there is the slightest tremor of enforcement or a politician stumbles into the black hole of public debt. The document under review, on the Luxembourg letterhead of GSK’s accountant Price Waterhouse Coopers (PWC), details the kinds of arrangements made and just as quickly reconfigured in the New World Order of unlimited tax evasion. It could have come from any of the three possible sources.
As mentioned at the end of Invisible Money 2, with Glaxo Smith Kline we are dealing in billions. Pearson Plc moves its millions around and gets the not-so-sweet tax rate of 1/32 percent of profits. GSK brings much more to the gambling table, and receives correspondingly preferential treatment from the croupier.
Not A Word Was Spoke Between Us
The document is dated November 11, 2009. Its first fourteen pages, filled out by generous white spaces, from the offices of Price Waterhouse Coopers, is addressed to Luxembourg’s Bureau d’imposition in the person of Marius Kohl, head of the Sociétés 6 division. His response to GSK’s proposed rearrangement of their tax arrangements in Luxembourg covers a terse six lines.
Price Waterhouse Coopers, tasked with creating the very best tax environment for the company, gives a short history of GSK’s involvement in Luxembourg: "…In 2008, GlaxoSmithKline International (Luxembourg) SA ("GSKIL") invested USD 10bn on a short-term basis with GlaxoSmithKline Finance ("GSK Fin"), a UK group treasury company, by an investment in the group’s commercial paper program."
Commercial paper is a short-term, negotiable promissory note. It is generally used to meet a corporation’s current expenses, is tradeable and cost-effective when compared to a bank loan. So: GSK Luxembourg has sent a note for USD 10bn to a UK subsidiary.
The GSK group now "contemplates" the creation of a new Luxembourg "entity" – a shell group in essence – with minimum share capital (that is, .30 pence, more or less) denominated in English pounds. But let the cautious accountant put it in the peculiar, dreamy language of the tax write-off:
"2. GlaxoSmithKline Group now contemplates to undergo various transactions involving the incorporation of a new Luxembourg company named GlaxoSmithKline Holding (Luxembourg) Sarl ("GSK NewLuxCo") with a minimum share capital denominated in GBP.
"3. Following this and planned for 2010, GSKIL’s USD 10bn investment in commercial paper with GSK Fin will mature. On the same day, GSKIL will change its functional currency from USD to GBP (i.e. conversion of its accounts to GBP) and the money received from the maturity of the USD 10bn commercial paper will be lent at a fixed rate for two years to GSK Fin in the amount of approximately 6.25bn GBP."
Voilà, or there you have it: a new company will be born. This terribly heavy lifting is day in, day out work for accountants. It is, at the risk of being tedious, a company on paper. An origami company dreamed up by a creative accountant during lunch hour.
Now the real fun begins. The poor in pence new entity is about to receive a rather stimulating windfall in the form of an intra-corporation issue, which it will then pass back to the UK – as a loan. The circle, like the old song says, is unbroken.
"4. Further to the above, GSK NewLuxCo will issue Zero Coupon Convertible Bonds ("ZCCBs") to GSKIL in exchange for the GBP 6.25bn long-term receivable that GSKIL holds towards GSK Fin."
Further down, at point 6, we learn that "Setfirst, the parent company of both GSKIL and GSK NewLuxCO, will lend GBP 2bn to GSK UKNewCo. GSK UKNewCo will acquire group companies for a corresponding amount."
2 billion pounds is the kind of money that can come in handy when you’re going shopping. You might want to check your wallet to see if you’re carrying anything like it. GSK was on July 16 of this year when they paid 3 billion in greenbacks for the American company Human Genome Sciences. This was two weeks to the day after the announcement of the settlement of what was called "the largest healthcare fraud settlement in history."
There Was Little Risk Involved
Continuing with Price Waterhouse Coopers’ proposal to the Luxembourg authorities, we note that in Section B2.8. they request that although they are doing business in Luxembourg, "GSK NewLuxCo and GSKIL will be allowed to use GBP as functional currency for tax purposes," thus wagering on fluctuations in the exchange rate; but more audaciously, in Section B3.11 they propose that "the ZCCBs are be treated as debt for Luxembourg tax purposes."
Bonds worth GBP 6.25bn issued by GSK Lux Co instantly treated as debt… an exemplary case of money vanishing in thin air. Or perhaps like the man in the circus coming down from the trapeze, walking across the floor in a straight line and telling the howling spectators that it is, really, after all, the same thing. He went from Point A to Point B, didn’t he? A scheme, to be sure, that would not pass legal muster in saner parts of the world. The result? No new taxable income for GSK International and healthy expenses to be deducted from the Luxembourg subsidiary’s UK-based income.
B.3 15 is the money shot: "Therefore, provided GSK NewLuxCo would be in a lending activity financed by borrowings in the amount of at least the GBP equivalent of EUR 6.25bn, a minimum gross margin of 1/64% p.a. of the total principal amount… would be considered an appropriate and acceptable profit with respect to article 164 LITL." There you have it: with the British pound historically stronger than the Euro, the total amount of the ZCCBs will remain above 6.25bn as calculated in Euros and will therefore be taxed at the 1/64 percentile under Luxembourg’s generous International Tax law. That, at least, is how PWC sees it.
At the end of 2010 GlaxoSmithKline International Luxembourg’s profits totaled over GBP 5bn. Their headquarters is located in a small building in Mamer, a suburb on the road to Belgium. Nothing is produced there except ingenious tax arrangements.
Everything Up To That Point Had Been Left Unresolved
A. J. Cronin once remarked that, apart from Shakespeare, trial transcripts were his favorite pasttime. Digging into a document like the all-too-short Price Waterhouse Coopers proposal is like reading a mass-produced children’s book. Everything is rosy, the world is beautiful and with just the slightest modification it can be even rosier. We read, and we feel certain that the nice people at GSK are going to get what they want: to move their money around within the company, and be rewarded with a profitable tax assessment for doing so. The denouement is no less quick and efficient. Here, in its entirety, is the full text of Marius Kohl’s response to PWC’s proposal on behalf on Glaxo Smith Kline.
"Further to your letter dated 11 November 2009 and reference SELL/*********** relating to the transactions that Glaxo Smith Kline would like to conduct, I find the contents of said letter to be in compliance with current tax legislation and administrative practice.
"It is understood that my above confirmation may only be used within the framework of the transactions contemplated by the aforementioned letter and that the principles described in your letter shall not apply ipso facto to other situations.
Kohl’s letter is dated and stamped November 11, 2009. He decided the case on the same day he received PWC’s proposal.
Invisible Money 4 appears next week and takes a look at the players in Luxembourg who make all of this possible.
Subtitle and section heads: Shelter from the Storm, Bob Dylan.