Bristol Myers In Over $1B Tax Brawl After Accidental Disclosure Of Offshore Patents Setup: NYT

An accidental disclosure last spring at the I.R.S has reportedly exposed a $1 billion tax fight with Bristol-Myers Squibb Co BMY. The agency believes the company used an abusive offshore scheme to avoid federal taxes. The disclosure was almost immediately pulled from public view.

The Case Details: According to New York Times, I.R.S says that the company could face nearly $1.4 billion in back taxes. The agency believes Bristol-Myers evaded paying as part of a scheme to move its patent rights from the U.S. to an Irish subsidiary and reap the income write-offs.

Almost nine years ago, BMY Squibb filed paperwork in Ireland to create a new offshore subsidiary, a move that could substantially reduce its U.S. tax bill.

Years later, the Internal Revenue Service got wind of the arrangement, which it condemned as an “abusive” tax shelter.

That is a lot of money, even for a large company like Bristol Myers. But the dispute remained secret. The company, which denies wrongdoing, didn’t tell its investors that the U.S. government claimed more than $1 billion in unpaid taxes. The I.R.S. didn’t make any public filings about it.

In 2012, it turned to PwC and White & Case for help getting an elaborate tax-avoidance strategy off the ground. The plan hinged on a tax write-off known as amortization.

Why It Matters: In the U.S., Bristol Myers held rights to patents on several drugs that it had already entirely written off for tax purposes.

In Ireland, a Bristol Myers subsidiary held rights to patents that it had not yet entirely written off.

That mismatch provided a lucrative opportunity. The company’s effective corporate tax rate was -7% in 2012 compared with 25% in 2011. With the difference so evident, the analysts reportedly quizzed executives on the disparity during a Q4 2012 earnings call — questions that BMY did not answer.

The company moved the patent rights from the U.S. and Irish subsidiaries into a new company. As the U.S. patents generated income, the Irish amortization deductions now helped offset U.S. taxes.

“Bristol Myers Squibb is in compliance with all applicable tax rules and regulations,” said Megan Morin, a company spokeswoman. “We work with leading experts in this area and will continue to work cooperatively with the I.R.S. to resolve this matter.”

A spokeswoman for PwC declined to comment to NYT. White & Case lawyers and a spokeswoman did not respond to a list of questions either.

Price Action: BMY shares are down 0.19% at $63.02 in market trading hours on the last check Thursday.