Jeremy Warner's Outlook: GlaxoSmithKline remains unrepentant to the last as drugs giant takes its tax punishment

Emissions: how green is your profit? Unions embrace economic liberalism
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The Independent Online

In business, it is usually better when confronted by the bully-boy tactics of governments and regulators to pay up and move on than to stand up and fight. This is essentially the position adopted by GlaxoSmithKline in settling with the US Internal Revenue Service over $15bn (£8bn) of disputed tax demands.

The damage to the bottom line is $3.1bn, which at about 20 per cent of the disputed sum is in line with the average for companies which have chosen to go the whole way with litigation. Glaxo might have paid more, it is quite unlikely to have paid less, and in the meantime it would have had a potentially huge liability hanging over the share price and, in Litigationville, would have been helping to support the flagging US housing market.

With $4.3bn already set aside in the balance sheet against tax disputes, settling was the wise course. That doesn't make the outcome any more palatable for foreign companies doing business in the US. The row relates to that hardy old perennial when it comes to tax - transfer pricing, a particular problem with drugs companies because so much of the profit relates to intellectual property. Through transfer pricing, companies have the opportunity to recognise profits in territories where the tax regime is most advantageous. International conventions exist to govern the way in which profit is allocated between the country where the product is discovered and developed, the place it is manufactured and where it is sold, but the process is bound to be somewhat subjective.

The nub of the IRS case was that too much of the profit on Zantac and other GlaxoSmithKline legacy products was kept in Britain, where the products were developed, and not enough was allocated to the US, where the great bulk of the sales were generated.

What made the IRS case particularly insulting was that it was based on the claim that Zantac was little more than a copy of an existing American anti-ulcer drug, Tagamet, and that its runaway success in the US was therefore more down to highly effective marketing by Glaxo's distribution business in the US than genuine innovation.

Strangely, the IRS adopts a completely different view when it comes to product innovation by American companies. Special rules have been introduced to prevent US companies siphoning off intellectual property profits into low-tax jurisdictions, and, where similar issues are raised with US companies selling overseas, it is vicious in insisting that the bulk of the profit is recognised in the US.

All very unsatisfactory and unfair, perhaps, but then again, the US is by far the largest healthcare market in the world, and the only one, moreover, where drugs aren't price-controlled. No pharma company of any size can afford not to be there. If the $3.1bn payment helps placate those US politicians calling for a renewed crackdown on "profiteering" drug companies, it might be thought a small price to pay.

Emissions: how green is your profit?

Roll up for the great carbon credit merry-go-round. Thanks to this wonderful invention, it is indeed possible to make a profit while saving the planet at the same time. Better still, it is now possible to make a profit out of saving the planet.

Leading the charge in this new business sector is James Cameron, vice-chairman of Climate Change Capital (CCC) and something of a facilitator in the development of carbon credit markets. CCC yesterday announced that it had raised $830m to invest in clean energy and the low-carbon economy, making it the largest fund of its type so far in the world.

At the same time, Mr Cameron unveiled details of his first investment - a project to help the Chinese chemicals outfit Zhejiang Juhua Co clean up its act. The company's refrigerant process generates a greenhouse gas - HFC-23 - which is 11,700 times more toxic in terms of its climate change potential than carbon dioxide.

CCC's investment will enable this output to be incinerated, thus generating carbon credits which can be sold in Europe and other markets with emission trading schemes. Such is Zhejiang's output that at a stroke the investment will generate certified emission reductions equivalent to one third of the annual greenhouse effect of UK households, or the entire energy sector of Belgium.

The initiative thus rather undermines the argument that it doesn't matter what the UK does on climate change because, whatever it is, it is likely to be too small to make any difference while China is so hell-bent on economic advancement.

The Chinese are in fact just as aware as the developed West of the dangers of climate change. Yet as long as the US and others who have caused the problem in the first place do nothing about it, nor will China halt or slow a process of development reasonably targeted at lifting hundreds of millions of people out of poverty.

The CCC investment, and the flood of others like it that will follow, begin the process of helping China deal with some of the negative aspects of rapid economic development. This would not be happening but for what is being done in Europe to reduce emissions. Provided EU governments remain firm in their resolve, there is every possibility of a virtuous circle of carbon reduction being established.

As for the investors - Centrica, Deutsche Bank and a number of major pension funds - their return depends crucially on governments holding their nerve too. If they falter, the price of credits will go through the floor and with it any chance of a profit. But if it works, then yet another fast growing market is created to swell the City bonus pool. Business and greenery were once thought a contradiction in terms. Mr Cameron is demonstrating that climate change is in fact an entrepreneurial opportunity.

Unions embrace economic liberalism

I laughed out loud on reading the story from the TUC annual conference that unions want unrestricted access to our labour markets for workers from Bulgaria and Romania whereas the CBI urges "a pause for breath".

Admittedly, union bosses accompany this conversion to the cause of economic liberalism with demands for greater employment protections and rights, but, even so, a more striking illustration of the topsy-turvy world we now live in, where right is left and left is right, is hard to imagine. Business leaders, or at least those who the CBI speaks for, are worried about the social consequences of another wave of cheap foreign labour coming into the market, but the unions don't seem to mind at all.

Brendan Barber, the TUC's general secretary, none the less makes a serious point. There's very little point in kicking against globalisation, a process now well beyond the point of no return, understandable though it is for employees to be disaffected by something which seems to undermine wages and jobs. For better or worse, globalisation is unstoppable, except perhaps through protectionism, which, as history has shown, tends to lead to much worse consequences.

Large numbers of Bulgarians and Romanians will migrate to Britain when they accede to the EU, whether they are allowed to seek employment here or not. They'll just enter the self-employed market, or work in the black economy, as so many illegal immigrants already do. The trick is instead for national governments to put in place policies that counter the negative effects - adequate social safety nets, greater investment in education, training and housing, decent employment terms and conditions, and so on.

The Government's instincts on these matters are essentially sound, even if the practice still leaves a lot to be desired. On immigration, the Daily Mail view of the world seems all too likely to prevail. These are politicians, after all. But the CBI and some of its members seem to be all over the place too in urging wage restraint and a rolling back of employment protections on the one hand, while proposing restricted access for foreign labour on the other. Let's make up our minds, shall we. You either believe in free markets or you don't.

j.warner@independent.co.uk

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