Schering Plough loses $473m tax appeal
A US COURT has found against Schering Plough in a case involving a multi-million dollar tax charge on funds generated in Ireland.
The $473 million (€322.8 million) tax charge was imposed by the US Internal Revenue Service on Schering in 2004 in relation to earnings in 1991 and 1992, and was appealed by the multinational which has offices in Bray and Rathdrum.
However, in a recent ruling in the courts in New Jersey, US District Justice Katharine Havden found against Schering.
The court had to rule on whether the payment by offshore subsidiaries of € 690 million to the US parent was a loan from the subsidiaries – which would have created a tax charge – or a payment for the assignment of future income streams to the subsidiaries as part of a complicated structure involving interest rate swaps with a third party.
This practice would not have created a tax charge. The court heard that a Schering-Plough subsidiary in Switzerland, Schering-Plough Ltd, conducted significant manufacturing operations in Ireland due to the favourable corporate tax rate for manufacturers in Ireland in the early 1990s.
By the end of 1991 the Swiss subsidiary had accumulated $829.7 million of largely untaxed cash from its operations in Ireland.
‘ Schering-Plough wanted to use the mostly untaxed offshore Irish cash in the United States for multiple purposes, including RD programmes, normal operating expenses, and particularly a $1 billion stock repurchase programme,’ according to Judge Hayden’s judgment.
The pharmaceutical giant consulted Dutch bank ABN and its principal financial adviser, Merrill Lynch who recommended a scheme involving lump sum payments associated with interest rate and currency swap contracts that would last for 20 years. Schering’s independent auditors Deloitte Touche approved the scheme, saying the transaction was a means of ‘ repatriating money from Europe without having it taxed as a dividend’.
However, when the IRS examined the transactions in later audits it found differently. In a notice issued in April 2004, it determined that the ‘substance of the transactions’ was not ‘consistent with the form of these transactions, and that these transactions lacked economic substance’.
It is understood that Schering Plough is considering its options following the judgment which would include appealing the decision.
Schering-Plough has an animal health products plant in Bray, Co Wicklow, where 240 people are employed. Earlier this year it announced it was to close the plant by mid-2011. They also have a plant in Rathdrum.