Forest Laboratories' Globe-Trotting Profits

From New York to Dublin, through Amsterdam to Bermuda—how one pharmaceutical company avoids a third of its U.S. income taxes by moving its money around the world

By Jesse Drucker

With a swipe of his debit card in a Phoenix pharmacy, Tyler Hurst bought a $99 bottle of Lexapro and kicked off a 9,400-mile odyssey of international corporate tax avoidance. Each stop along the way—an industrial park in Dublin, a skyscraper in Amsterdam, a palm-shaded law office in Bermuda—helps the medicine's maker, Forest Laboratories (FRX), cut its income tax bill. Although all of Forest's Lexapro sales are in the U.S., the company moves profits generated by the world's third-best-selling antidepressant from subsidiary to subsidiary overseas, exploiting tax advantages in multiple countries. The technique, known as transfer pricing, reduced Forest's net U.S. tax bill by more than a third in 2009, according to the company's annual report.

Forest declined to discuss its transfer-pricing techniques. Nor would it say how much it made from the $99 that the Phoenix customer paid for his month's supply of Lexapro. For top-selling prescription drugs, the retailer would keep about $12, and $2 would go to a wholesaler, says Helene Wolk, an analyst at Sanford C. Bernstein in New York. The remaining $85, she says, would go to Forest. Since its debut in 2002, Lexapro has generated $13.8 billion in sales for Forest, according to analyst Gary Nachman of Leerink Swann in New York. The drug accounted for 58 percent of Forest's sales for the fiscal year that ended on Mar. 31.

Thousands of other companies, from Oracle (ORCL) to Eli Lilly (LLY) to Pfizer (PFE), also legally avoid some income taxes by using transfer pricing, typically converting sales in one country to paper profits in another, often a place where they have few employees or actual sales. GlaxoSmithKline (GSK), the U.K.'s largest drugmaker, settled a transfer-pricing case with the U.S. in 2006 for $3.4 billion. Since December, the IRS and the Justice Dept. have lost two such cases against Silicon Valley companies: a $24.3 million dispute with chipmaker Xilinx (XLNX) and a $545 million battle with software maker Symantec (SYMC).

In February the Obama Administration, which faces a projected budget deficit of $1.5 trillion this year, said it would target some transfer-pricing techniques as part of a crackdown intended to raise $12 billion a year over the coming decade. That's one-fifth of the estimated $60 billion in U.S. tax revenue lost to transfer pricing each year, according to a study by Kimberly A. Clausing, an economics professor at Reed College in Portland, Ore. By 2009, U.S. companies amassed at least $1 trillion in foreign profits not taxed in the U.S., according to data compiled by Bloomberg. That cumulative figure, based on filings by 135 companies, has increased from $590 billion in 2006, up 70 percent. Part of the increase is the result of growing sales abroad; much of it springs from expanded use of transfer pricing, says Martin Sullivan, a tax economist and writer who has worked for the Treasury Dept. and Arthur Andersen.

Senator Carl Levin (D-Mich.), the chairman of the Senate Permanent Subcommittee on Investigations, calls transfer pricing "the corporate equivalent of the secret offshore accounts of individual tax dodgers." Senator Byron Dorgan (D-N.D.) calls for scrapping the IRS rules that allow this "unbelievable scandal." Enforcement of these rules, according to Dorgan, is impossible. "It's the equivalent of asking the Internal Revenue Service to connect the ends of two different plates of spaghetti."

Business Exchange

Track and share business topics across the Web.