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As Valeant's profile rises, tax avoidance will raise ire

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With its proposed takeover of Bausch & Lomb Inc., Canadian drug company Valeant Pharmaceuticals International Inc. continues its march toward big-time status. The deal will create a company with upward of $8-billion in revenue and an appetite for more; CEO Michael Pearson said early this year he expected the serially acquisitive company would reach the $10-billion mark "in the foreseeable future."

But Valeant's graduation to the big time may be sooner than that in one unflattering way. It should be only a matter of time before Valeant is mentioned in the same breath as Amazon, Apple and Starbucks – as the latest globally successful company to be scorned for exploiting global tax laws.

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Valeant pays little tax: its cash tax rate is in the mid-single digits. That is the result of the 2010 deal that created Valeant: a merger between Canadian drug maker Biovail Corp. and the former U.S. company called Valeant. Officially, Biovail took over Valeant but it was effectively a reverse takeover, with Mr. Pearson, the CEO of the old Valeant, targeting Biovail for the Mississauga, Ont. firm's domicile outside the U.S. As a result, the new company could maintain an exquisitely crafted international tax structure that allowed it to transfer its intellectual property to tax havens. Unlike a U.S.-based company, Valeant could then repatriate the profits to Canada without paying hefty taxes. Today, Valeant is a Canadian company in paperwork only. Its headquarters is in Laval, Que., but Mr. Pearson runs the company out of offices near his home in New Jersey.

There is nothing illegal about using a multinational approach to avoiding taxes (As an American company, Apple's tactics are slightly different, but the end result is similar). "Look, it's an important asset that we have, so we always are concerned and think about it and make sure we do everything in accordance to all the international rules," Mr. Pearson said in an interview. "We feel very comfortable that everything we do from a tax standpoint is tried and true, and that many other companies are following the same treaties and approaches."

That's fine as long as the international tax laws allow Valeant to dodge taxes. The question is how much longer that situation exists. There is a growing movement among highly-indebted, governments to rein in multinational corporations who structure themselves to avoid taxes. European politicians are pushing to enact a law that would force companies to reveal profits and taxes by country. Meanwhile, some are hoping for substantive changes following G8 and G20 meetings this year where international tax avoidance is a central topic. "You cannot have a situation of crisis, unemployment, people unhappy, facing increases in taxes and no recovery and at the same time big, profitable juicy players not paying a penny," Pascal Saint-Amans, head of the Organisation for Economic Co-operation and Development's tax centre, told Reuters this month. "You need to neutralize the use of tax havens."

All of this is met with a shrug by Valeant executives. As Mr. Pearson notes, other pharma companies that are much larger and higher-profile, notably in Europe, are doing the same thing. But while substantive changes in the legal framework will be difficult to achieve and could get bogged down in multilateral discussions that eventually peter out when the world economy rebounds, the public chorus is growing louder. Valeant may be labelled yet another tax avoider, and while shareholders don't yet seem to mind, they will if politicians actually start responding to public discontent with more than lip service.

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Sean Silcoff is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Sean on Twitter at @seansilcoff.

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