Senate Finance Committee Challenges Pfizer on Transfer Pricing Discrepancies

Transfer pricing is a commonly utilized tool for profit shifting employed by multinational enterprises (MNEs). In the case of U.S.-based Big Pharma companies, offshoring intellectual property, aggressive transfer pricing, foreign manufacturing, and other strategies may result in disproportionate amounts of income being realized by their offshore subsidiaries in favorably taxed jurisdictions. Foreseeably, the U.S. government is unfavorable towards such arrangements. A case in point is Pfizer.

Senate Committee on Finance Chair Ron Wyden is a familiar name for pharmaceutical giants. Senator Wyden has questioned Pfizer on what he and the committee perceive as inconsistent and opaque practices. While Pfizer has reported data in their required country-by-country reporting, Wyden has requested additional specificity related to their earnings.

In a letter to Pfizer’s senior vice president of U.S. Policy and Government Relations, Wyden requested specific details such as pre-tax earnings, profit margins, employee count, and taxes paid. Wyden suspects that Pfizer has engaged in improper profit-shifting through transfer pricing strategies to countries and territories like Singapore and Puerto Rico. These locations are known for their corporate-friendly tax agreements.

Wyden singled out Pfizer as the only large pharmaceutical company out of six under investigation, unwilling to comply. In a recent memo, Wyden states, “For example, in 2023, Pfizer claimed a $4.4 billion loss in the U.S. on $27 billion in U.S. sales while reporting $5.4 billion in earnings on $31 billion in foreign sales. Similarly, in 2020, Pfizer claimed a $2.9 billion loss in the U.S. on $21.7 billion in U.S. sales while reporting a $9.9 billion profit on equivalent foreign sales”. This discrepancy is further highlighted by the fact that in 2022, although the U.S. market accounted for 42% of Pfizer’s global revenue, the company reported only 16% of its profits in the U.S.

In response to these allegations, Pfizer stated in 2023 that questions asked by the Senate Finance Committee would “implicate confidential arrangements” with Puerto Rico and Singapore. Wyden disagreed with Pfizer’s reasoning for not disclosing the details. He stated, “I take seriously the need to protect taxpayer privacy and the confidentiality of tax return information, but Section 6103 does not prevent Pfizer from providing any information contained in its tax returns to the Committee, including how much of Pfizer’s taxable income is reported by controlled foreign corporations.”

In the latest development, Wyden gave Pfizer until October 11 to comply. He indicated that the company’s reluctance and non-compliance with the Senate Finance Committee’s requests only heightened his suspicion that Pfizer utilizes profit-shifting methods to avoid paying billions of dollars in U.S. federal income taxes on domestic drug sales.

In today’s global business environment, we can anticipate increased scrutiny from tax authorities. This heightened examination is likely to be supported by the use of artificial intelligence to analyze and compare data. Such examples underscore the critical importance of having accurate and comprehensive transfer pricing documentation.

Contact our Global Business Services team with questions on transfer pricing compliance or any other international tax issue.