Transfer Pricing at Heart of Pfizer Case (Pakistan)

Executive Summary

Pfizer Inc. says it will appeal a court ruling in Pakistan that sided with a small group of investors who alleged that the multinational systematically drained the coffers of its local operations through artificially high prices for drug ingredients. The eight investors are part of a dwindling group of shareholders who now own less than 0.5 percent in Pfizer Laboratories Ltd (PLL), and maintain that their original holdings are investments that their parents made in a company called Dumex, acquired by Pfizer in 1959. The shareholders allege that Pfizer has deliberately contributed to poor results at its Pakistan operations, thus continuously diluting the value of the minority stakeholders' shares in an attempt to get 100 percent control of the business for less than what it is worth. A larger issue of "transfer pricing," a common system under which related but separate companies assign prices for goods or services transferred from one company to the other, lies at the heart of the case. As these are negotiated prices, there is potential for one company, especially the parent or majority shareholder, to take advantage of a unit. Governments and regulators in the developing world, including India and Pakistan, have been particularly suspicious of opaque transfer pricing mechanisms, due to concern that a foreign parent company could use such transactions to drain resources away from the local unit to a foreign parent. According to a court ordered examination of PLL's practices conducted by Ernst & Young, Pfizer exported drug raw materials to the Pakistani unit at prices that were, in some cases, up to 70 times those charged by alternative providers. (Click here for more