- About HHR
When it comes to health, data matter: it can tell us when, where, and how global health is affected, for better or worse. But not only is some important data hard to access, it is rarely analyzed in a way that can truly provide us with any understanding as to whether people’s health rights are being realized. The process of gathering, selecting, and critically analyzing health data is inherently political. And as the recent release of the Panama Papers has shown, it’s so often a politics of indifference. And when it comes to global health, this indifference kills.
For example, any loss of tax revenues has a direct impact on access to medicines because countries have less revenue to purchase and supply medicines. Despite all governments’ knowledge of the damage caused by tax havens, no measures have been taken to change the rules to ensure a fairer, more transparent system.
Several weeks before the African Network of Centers for Investigative Reporting (ANCIR) launched the first series of Africa stories based on the Panama Papers, we had a paper published in the World Policy Journal about the mispricing of pharmaceutical patents using intangible capital.1 This strategy, among others, created a $140 billion tax vacuum on the part of 13 pharmaceutical companies, incorporated or based in the United States. It was easy enough to do for companies to do, using ‘intangible capital’. Intangible capital is the value a company places on its own intangible assets, for example, patents, trademarks, copyrights, or business methodologies are all common intangible assets. These assets are effectively worth whatever the company says they are worth. So, if a company creates an intangible asset, like a drug patent, and transfers it to a subsidiary company residing in a tax haven, that subsidiary company can charge the parent company very high costs to use the intangible asset.
Global reporting standards are set by the International Accounting Standard Board (IASB) but it has deferred further work towards mandatory reporting or regulation of internally developed intangible assets.
The critique of pharmaceutical companies has often focused on access to generic medicines. Less attention has been paid to the legitimacy of the costs of patented medicines. Data analysis of new drugs that their manufacturers claim have cost over $1 billion to bring to market shows that patents can be artificially inflated by up to 80%. Pharmaceutical companies blame the cost of research and development (R&D) for the high costs of new drugs, particularly in the United States where there is no price ceiling on drugs. Yet of the $550 billion in profits generated from 1996 to 2005, only $228 billion was expended on R&D, compared to $739 billion spent on marketing the new products. The actual breakdown of R&D is vague. Capitalised costs—described as the expected return that investors forego during development, had they instead invested in Wall Street—in some instances has accounted for about half of all new drug development costs. A further 30% or more is subsidised by public taxpayer funds through tax deduction for every dollar spent on research. This accounts for up to 80% of the total costs. While tax subsidisation isn’t unusual, what is unusual is that the actual costs behind what is being subsidised is rarely disclosed and that subsidisation through public funding has no impact on the extraordinary costs of the ultimate product which the public can, often, ill afford.
Then came the Panama Papers: over 11.5 million pieces of information showing just how normalized illicit activities are in a globalized world using tax havens. Governments, usually in poor countries, write financial secrecy laws to enable foreign ‘investors’ to circulate capital in their jurisdictions although no business activities actually occur. Most of these countries are tied to major Western economies such as the City of London, the head office to the bulk of the world’s tax havens via its territories, or New York. About half the tax havens used by Mossack Fonseca—such as Anguilla, Bahamas, British Virgin Islands, Jersey, Nevada, Wyoming, and Isle of Man—are part of the US and UK political landscape. So who ‘rents’ these jurisdictions? Mossack Fonseca’s clients include global financial institutions like HSBC, UBS, Rothschild, and Credit Suisse, with branches in tax havens such as the Channel Islands, Guersney, Isle of Man, Luxembourg and Switzerland. As I reported in 2010, bank branches located in tax havens do not share information with ‘onshore’ governments, even if the client is a citizen of the onshore government, unless the information is already in the possession of the inquiring authority—this is a classic Catch 22.
When it comes to health, as ANCIR’s investigative project of 13 pharmaceutical companies revealed, not all tax havens are equal. The tax havens used as the places of residence for subsidiaries holding the intangible assets were: Delaware, US (287 subsidiaries), Netherlands (166 subsidiaries), Ireland (102 subsidiaries), Switzerland (84 subsidiaries) and Luxembourg (64 subsidiaries). Delaware’s competitive edge is its complete exemption of all intangible income. In Luxembourg, exemption is 80% provided the activities are intra-company or between subsidiaries of the same parent entity. Companies have then specifically created corporate structures designed to ensure both secrecy and tax exemption of costs, real or otherwise, attributed to intangible assets.
So, what does this have to do with global health? Tax havens are used when entities or persons need a legal vehicle to camouflage illicit or immoral intent—whether this is for organ trafficking, misusing public monies or other corrupt acts, or, if companies want to create artificial costs to siphon off from earnings. All these activities rely on the same intermediaries: accounting and legal firms, banks, and nominees or false fronts like Mossack Fonseca. Each uses the same methods for the same ends: to hide a practice that would be considered harmful, unethical, or illegal in countries where these activities actually take place. But when, for example, the African continent loses $150 billion annually of its own money in these schemes, it’s not just illicit financial flows, it’s blood money: cash siphoned from healthcare, water and waste sanitation, infrastructure and housing. This is part of the same hidden system that devastates global health, making health care unaffordable and unavailable, and sentencing entire populations to suffer ill health and premature death, not just in poor countries but the poor in rich countries, too.
One thing the Panama Papers has made clear is that all countries are corrupt in similar ways because they all use these techniques and are all advised by the same actors exploiting the same systemic loopholes.
But like all human rights-denying systems, secrecy jurisdictions can be ended through international law. They can even be blocked by individual national governments that take a stand against use of jurisdictions where no real economic activity occurs. To do so would require a radical transformation of what data should be disclosed and how: for instance, the use of disaggregated financial statements—also known as country-by-country reporting—that shows where taxes are paid, where profits are recorded, names of beneficial owners and linked companies, purpose of these companies, the extent of transfer pricing and the location and value of intangible assets. Billions of dollars currently kept offshore, by pharmaceutical companies and others, needs to be taxed. This matters for health.
It’s critical that countries need to work together, because if they legislate in an isolated manner the market will again be distorted. An alternative global approach would require complete disclosure of an entity’s financial activities so that patents and profits are identifiable and transparent. The argument against full and public disclosure used by multinationals, including the pharmaceutical sector, is that only investors deserve information, or that full disclosure places an undue burden on the company. This argument runs counter to human rights and democracy, and ultimately denies people their health rights.
If the Panama Papers teach us anything, it’s that globally, the powerful are privileged and the poor are paying the price.
Khadija Sharife is a forensic financial researcher and writer based in South Africa. She is the editor of African Network of Centers for Investigative Reporting (ANCIR) and the author of Tax Us If You Can: Africa (Pambazuka). Her work has appeared in academic publications such as South African Journal of Human Rights as well as mainstream media including Al Jazeera, Le Monde Diplomatique, and New African.
- K. Sharife, “Big Pharma’s Taxing Situation,” World Policy Journal, 33/1, Spring (2016), pp 88-95.