Case study: Shire

How Shire’s internal lending cuts its tax bill

A tiny Luxembourg-based unit of Shire, a multinational drug firm specialising in treatments for ADHD, Crohn’s disease and rare genetic disorders, has become one of the most profitable outposts of the pharmaceutical empire. Shire is a £24bn transatlantic drugs group with big operations in the UK town of Basingstoke, and Pennsylvania and Massachusetts in the US. It shifted its corporate head office from the UK to Ireland for tax purposes in 2008 and is registered in the tax-friendly island of Jersey. The majority of its sales are in north America.

One of Shire’s Luxembourg units has made $1.87bn in profits in the last five years, largely from making loans to sister companies, as it charged interest rates of up to 9% on those loans. With what appears to be the consent of the Luxembourg authorities, the enormous profits generated by this unit were taxed at a fraction of 1%.

Shire’s tiny Luxembourg finance company in an office with dozens of other corporate occupants — Shire Holdings Europe No2 Sarl, or SHES2 for short — has lent out a total of more than $10bn.

Away from Luxembourg, more than two-thirds of Shire’s $5bn in annual revenues came from the sale of prescription drugs in the US and Canada last year. But group profits around the world were taxed at an average of 16.4% — less than half the official tax rate for most big businesses in America.

Somehow, the FTSE 100 firm had hit upon the holy grail of tax management: a structure that allowed it to access some of the most profitable healthcare markets in the world while keeping its tax bill low at the same time.

The main factor pushing down its tax bill is explained in the smallprint of the group’s annual report as “intra-group items”. That is, the tax consequences of investments and transactions between Shire group companies around the world.

Leaked letters from PwC, Shire’s tax advisers, reveal how far Shire was prepared to go to conjure up tax advantages through highly artificial tax structures.

The confidential papers reveal the critical role in group tax planning played by SHES2 — one of seven Shire companies incorporated in Luxembourg.

Over the last five years this business received $1.91bn of interest income from loans it made to other Shire companies, including more than $580m last year alone. By the end of 2013, sister companies within the Shire group owed SHES2 more than $10bn in loans and interest — equivalent to more than two years’ sales for the entire group.

The Guardian asked Shire why it had such large internal loans when the overall group had few borrowing needs. Shire declined to comment.

The borrower companies and where they operate remains unknown. It is likely however that the vast interest payments have created huge tax deductions for these sister units, whose profits are lowered by the cost of paying the interest on the Luxembourg loans.

With minimal operating costs — including staff wage bills of less than $55,000 a year — SHES2 appears to be one of Shire’s most lucrative business units with profits over five years of $1.87bn.

But Shire’s annual report makes mention of SHES2 only once, in an appendix that lists the group’s subsidiaries.

Meanwhile, accounts for SHES2, filed in Luxembourg, show that, despite its towering profits, the company recorded no corporate income tax charge at all.

Company filings show SHES2 had just four official managers, two of whom were senior figures in Shire’s tax department, working at UK head office in Basingstoke, England. Among them is Fearghas Carruthers, the group’s head of tax.

The key to solving the riddle of how SHES2 appears to have made $1.91bn of interest income almost disappear for tax purposes is found in leaked Luxembourg letters from tax advisers at PwC to the local tax office. They offer a rare glimpse into the group’s labyrinthine corporate structures.

A diagram provided by PwC to help the Luxembourg tax authority to understand the corporate structure of Shire. The Guardian has picked out SHES2 and an Irish company called Shire Holdings Ireland No.2 Limited in yellow. The circle labelled “LuxPE” is the Irish company’s Luxembourg branch. Photograph: Guardian

The answer lies in Ireland, where Shire moved its corporate headquarters from the UK in 2008 after the Labour government had attempted a crackdown on UK multinationals using internal financing companies in aggressive tax planning structures.

Among a cluster of Irish-registered Shire firms is a holding company Shire Holdings Ireland No.2 Limited, or SHIL2 for short. This Irish company has for years been charging itself interest on billions of dollars of loans — to itself. More specifically, the interest has been charged on loans from SHIL2’s head office registered near Dublin to a SHIL2 branch office in Luxembourg.

Leaked papers show that Shire’s tax advisers told the Luxembourg tax authorities that this unusual lending within the same legal entity had transformed the drug group’s wider activities in the Grand Duchy into a lending conduit: pushing one large loan from Ireland, through two Luxembourg units (SHIL2 and SHES2), and onwards to Shire companies around the world.

Such a chain of back-to-back lending, advisers from PwC argued, effectively meant Shire’s intra-group loans were only passing through Luxembourg. Therefore, the local taxman did not need to conduct a rigorous assessment of Shire’s tax liabilities. The full Luxembourg corporate tax rate should still apply, but only on a notional amount of profit. In Shire’s case, PwC suggested, the Grand Duchy should be satisfied taxing just “1/64%” — that is 0.0156% — of the billions in loans and interest owing to SHES2.

A letter of consent from the Luxembourg tax office does not appear in the cache of leaked files, but it is clear from publicly available filings elsewhere that the avoidance structure was set up in 2008 and appears to have remained active at least as recently as the end of 2013.

By the end, the complex structure had created a multi-billion-dollar lending chain, bearing no relation to Shire’s overall borrowing needs. The structure appeared to have little commercial benefit other than a tax conjuring trick: tax bills have been lowered for Shire borrower companies around the world while the group’s Luxembourg operations had all but escaped corresponding tax on the interest income.

In a statement, the group said: “Shire Holdings Europe No.2 Sarl, is part of our overall treasury operations. We have a responsibility to all our stakeholders to manage our business responsibly; this includes managing our tax affairs in the interest of all stakeholders.”