Besides simply selling pills at a profit, Forest Labs appears to engage in what's known as transfer pricing - a highly complicated way of avoiding taxes by creating overseas subsidiaries that, in Forest's case, are used to hold patents and facilitate transactions out of reach of the US Treasury.
To illustrate the complexities, Bloomberg News attempted to follow the mysterious trail of dollars generated by Lexapro, Forest's wildly popular antidepressant, an effort that involved visiting not only a manufacturing plant in Ireland, where tax rates are lower, but also revealed subsidiaries in Bermuda and The Netherlands that appear to function merely as convenient shells.
By playing the avoidance game, Forest cut its US tax bill by more than one-third last year and various international tax benefits boosted its net income by 31 percent, according to an analysis of its tax footnotes. The IRS tagged Forest once before for failing to properly value its US marketing operations and paid an undisclosed amount to resolve the dispute, but the drugmaker apppears undeterred.
The issue, however, is generating heat and drugmakers will have to take notice. Glaxo, for instance, settled a case four years ago by paying $3.4 billion and more cases appear likely. “Transfer pricing is the corporate equivalent of the secret offshore accounts of individual tax dodgers,” Senator Carl Levin, a Michigan Democrat and chairman of the Senate’s Permanent Subcommittee on Investigations, tells Bloomberg. “Now that progress has been made in addressing offshore tax abuse by individuals, transfer pricing is an issue that deserves scrutiny.”