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Big Pharma’s Tax Break – Unbelievable?!

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Americans pay roughly triple what people in the world’s other big economies pay for the same name-brand, on-patent drugs. Yet the six major U.S. pharma firms that provide fairly detailed accounting data reported their profit margin in the U.S. was 5% and the profit margin abroad was 50%. Most of the U.S. based major pharma companies have perfected the art of legally shifting the profit on their U.S. sales out of the country to low-tax jurisdictions. Where is big pharma’s tax break coming from?

May 11, 2023 Senate Finance Committee Report

Senate Finance Committee Chairman, Ron Wyden, released a staff memorandum on May 11, 2023 updating his findings on the ongoing investigation into big pharma’s tax practices. Wyden’s interest in this problem started with the 2017 corporate tax reform law. This law imposed a special 10.5% tax rate on profits made outside the U.S. This was meant to solve the issue of companies parking money in other countries to avoid U.S. taxes. But the new rules allowed companies to blend all of their foreign profits together so a company with profits in a high-tax country like Germany could use its mandatory payments there to offset some of the earnings attributable to no-tax jurisdictions such as Bermuda. Big pharma reports 75% of their taxable income overseas. From 2014 to 2016, the year’s right before this new law, the pharma industry paid a tax rate of about 20%. This average fell to 11.6% in 2019 and 2020 as big pharma’s tax break got even bigger.

Wait! Isn’t the corporate tax rate 21%?

Yes, but the largest and most profitable pharma companies don’t pay anything close to that. The effective tax rate for most of big pharma is much closer to 10%. With the shifting of the profits overseas the eight largest U.S. pharma companies end up paying taxes on only about 3% of their global profit to the U.S. Treasury.

Big pharma moves their profits to no-tax jurisdictions, like Bermuda, by parking their intellectual property, such as patents that give them a legal monopoly, in no- or low-tax jurisdictions. Add to this drug manufacturing being moved to tax haven countries like Ireland, Singapore, Switzerland and Belgium and almost all profits earned on U.S. sales are shifted to the low-tax jurisdictions. This means tax policy itself has created an incentive for big pharma to put their profits, investments and jobs overseas.

Tax Credits for Research and Development

In many cases the profits being taxed overseas come from drugs developed through research made possible by the National Institutes of Health funding and U.S. tax credits for research and development. The U.S. gets neither the biopharma manufacturing jobs nor the tax revenues from medicines brought to market by U.S. companies and product sold at elevated prices to U.S. taxpayers and supported by NIH funding.

Recommended Reforms?

The Council on Foreign Relations (CFR) recommends some common-sense reforms on big pharma’s tax break. Subject all overseas profits to a 15% minimum tax, assessed on a country-by-country basis to avoid accounting tricks. Place limits on pharma firms’ ability to claim tax credits for research on the development of drugs when the intellectual property is then shifted outside of the U.S. This would also eliminate the incentive to offshore pharma production and U.S. jobs. As Senior Fellow at CFR, Brad Setser, says, “The net results would be more biopharmaceutical investment in the U.S., more tax revenues for the U.S. Treasury, and, ultimately, a more resilient and more innovative U.S. economy.”

Interested in growing your U.S. pharma staff? Contact Smith Hanley Associates’ Pharmaceutical Industry Recruiter, Nihar Parikh at nparikh@smithhanley.com

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