Transfer Pricing - The corporate equivalent of secret individual offshore accounts

Jesse Drucker, writing for Bloomberg, reported a complicated transfer pricing scheme involving Forest Lab's Lexapro. The strategy shifts dollars from American sales of the blockbuster drug to other countries where tax rates are lower than in the US. Drucker estimates that corporate transfer pricing strategies, like this one involving Lexapro, enable thousands of companies to avoid paying $60 billion per year in US tax revenue.

Transfer pricing schemes involve the overpricing of imports and/or the underpricing of exports between related companies in different countries for the purpose of transferring profits or revenue out of the United States in order to evade taxes. The profits and revenue end up in a country that has a lower corporate tax rate than the US.

US Senator Carl Levin of Michigan has been a long time foe of transfer pricing schemes and has been quoted as saying they are "the corporate equivalent of the secret offshore accounts of individual tax dodgers." Levin introduced the Stop Tax Haven Abuse Act in March 2009. The bill allows US tax and securities agencies to treat non-publicly traded offshore entities as being controlled by the US taxpayer who formed them, sent or received assets to them, or benefited from them, unless the taxpayer proves otherwise. Despite strong support from the Obama administration, the bill has yet to pass. Critics of the bill say transfer pricing requires a mult-lateral fix, and the bill's US-centric focus will likely not be successful in remedying the problem.

In the meantime, reports Drucker, Forest Laboratories is employing a "Double Irish" corporate structure to transfer some of the revenue from Lexapro to Ireland, Amsterdam, and Bermuda to show profit from Lexapro in those countries as opposed to the United States, the country where the product is being purchased. Tax savings for Forest are significant. If the profit from Lexapro is reported as US income, the profit could be subject to the US corporate tax rate of 35 percent. In Ireland, the corporate tax rate is between 10% and 12.5%.

To read Jesse Drucker's article, click here.

K&M Represents Whistleblower in $520 Million AstraZeneca Settlement

AstraZeneca has agreed to pay $520 million in civil fines, penalties, and damages to settle allegations that the company defrauded Medicare, Medicaid, and other government-funded health care programs in connection with its marketing and promotional practices for the blockbuster atypical antipsychotic Seroquel. This is the largest settlement of off-label marketing claims brought under the False Claims Act to date that involved civil-only fines. The $520 million settlement resolves a qui tam lawsuit filed by whistleblower Dr. Stefan Kruszewski, one of two relators to file a case. Dr. Kruszewski was represented by Brian Kenney and Tavy Deming of Kenney & McCafferty, along with William Leonard of Obermayer, Rebmann, Maxwell & Hippel. For more information about the settlement, click here.

Not Fundamentally Designed to be Successful

"Not fundamentally designed to be successful." That's what the Inspector General's Office had to say in its March 2010 Assessment of the SEC's Bounty Program. OIG identified problems with the program when it released its August Report on the "Investigation of Failure of the SEC to Uncover Bernie Madoff's Ponzi Scheme." The latest report details the follow up investigation of the SEC's whistleblower program.

According to the OIG report, the SEC has had its bounty program in place for more than 20 years. The program provides for rewards to whistleblowers for reporting insider trading. The OIG found that the program was not recognized inside or outside of the SEC and that few applications had ever been received by the program.

Many of the recommendations that followed the OIG's findings appeared to basic, common sense management practices. For example, one recommendation is to keep some kind of file, whether it be hard copy or electronic, for each bounty application. The file, according to the OIG report, should contain, at minimum:

• The bounty application
• Any correspondence with the whistleblower
• Documentation of how the whistleblower's information was utilized
• Documentation regarding any significant decisions made with regard to the claim

A bit of a concern is the recommendation that the SEC Bounty Program should incorporate "best practices" from the IRS Whistleblower Rewards Program. One hopes that that new SEC program would incorporate ideas from the latest incarnation of the tax fraud program under Director Stephen Whitlock and eschew past versions. Prior to Whitlock's leadership, the tax reward program showed similar problems to those currently capturing the attention of SEC watchers. While much improved in the last few years, the Service is still struggling to find lost complaints and improve communication with whistleblowers.

The SEC is charged with providing OIG with a written corrective action plan designed to address the recommendations. The plan should appear in late May.

SEC Whistleblower Program Proposals – Another dismal failure or real opportunity?

Senate Banking Committee Chairman Christopher Dodd of Connecticut introduced a financial reform bill on March 15, 2010. The proposal includes a new whistleblower program to reward those who assist the Securities and Exchange Commission (SEC) in its enforcement of securities violations, like violations of the Foreign Corrupt Practices Act.

The SEC already has a program in place to reward whistleblowers in insider trading programs. The existing program is widely regarded as a dismal failure, having paid only four rewards totaling only $67,570. In the last year, at least three proposals have been discussed to establish a new SEC whistleblower program, including the most recent Dodd proposal.

Dodd's bill proposes that whistleblowers who provide original information that leads to monetary sanctions would be paid between 10and 30 percent of any money the government collects that results from the information provided by the whistleblower. Whistleblowers would also receive rewards if their information leads to other successful "related actions," i.e. actions brought by other federal and state regulatory agencies, including the DOJ and foreign law enforcement agencies.

Most commentators watching the process feel that the final version of the new SEC program will be very similar to the IRS whistleblower rewards program. They expect the SEC program will include the IRS's one bite rule, for example, though the IRS itself appears to be moving away from full implementation of the civil investigation prohibition against talking to tax whistleblowers more than once. The Service's criminal division never adhered to the one bite rule, and now, the IRS civil division is embracing whistleblowers to a greater degree as well. It would be unfortunate if any new SEC whistleblower program blindly adopted IRS rules, like the one bite rule, without learning from the IRS's mistakes. The SEC has a dismal record with whistleblower incentive and protection programs. It would be best for the American people if any new SEC provision learned from, rather than repeated, the mistakes of other whistleblower programs.

IRS Makes Good: $5.5 Million Partial Payment to K&M Client

Philadelphia, PA/January 11, 2010. The IRS Whistleblower Office facilitated a partial payment of $5.5 million to a Kenney & McCafferty, P.C. whistleblower who reported tax fraud seven years ago. The payment is the first substantial payment to be made under the auspices of the IRS Whistleblower Office.

“We feel good about the positive changes that we’ve seen in the Whistleblowers Office in the last two years,” said lead partner Brian Kenney of Kenney & McCafferty. “Things are getting easier for tax whistleblowers who want to help the IRS recover money for the Treasury. We’re getting answers and results that three years ago would have been impossible to obtain. We expect that an additional payment will be made in this case within the next few months.”

The K&M tax whistleblower first contacted Brian Kenney eight years ago about a complex, international a stock and tax fraud scheme orchestrated by a overseas-based corporate conglomerate. As a result of the whistleblower coming forward the United States has recovered over $60 million in taxes, fines, and penalties. The K&M whistleblower’s identity remains confidential, consistent with provisions of the new IRS Rewards Program. In 2006, Senator Chuck Grassley championed legislation to incentivize tax whistleblowers to come forward with information to assist the Service in recovering tax dollars improperly withheld by taxpayers. The new IRS Rewards Program guarantees a percentage of the Service’s recovery to those who make meritorious claims. To improve the way the Service works with whistleblowers, the IRS formed a Whistleblowers Office to track whistleblower reports. Steven Whitlock became Director of the new Office three years ago.

Linda Stengle, K&M’s attorney assigned to the case, credits the Whistleblower Office for facilitating the reward. “Director Steven Whitlock has evolved the WO into a responsive, knowledgeable unit in just a short time. Dawn Applebaum, the Analyst assigned to the case, made the system work for our client here. Things happened quickly, after years and years of waiting.”

Kenney notes that the recent TIGTA report presented a dismal picture for would-be tax whistleblowers. The TIGTA report noted the Whistleblower Office lost claims, long delays, and duplicative record keeping systems resulted in a poor record for the fledgling Rewards Program. Under the old system, the lack of uniform oversight meant that whistleblowers had to wait as long as ten years to learn if they would receive any reward at all. Whistleblowers grew frustrated by bureaucratic snafus.

“A lot of the things noted in the TIGTA report are old news,” said Kenney. “We’ve been monitoring the situation very closely, and we’re impressed with the changes we’ve seen in the program. It’s much more efficient and effective than it was just a year ago. We’re optimistic.”
Brian Kenney’s optimism about whistleblower programs has led him to become one of the leading tax whistleblower attorneys in the country. Kenney & McCafferty, P.C. focuses on qui tam and tax whistleblower litigation. Its attorneys have recovered more than $4 billion for the government in False Claims Act and tax whistleblower cases. For more information, contact Linda Stengle at 610-940-0327.