Drugmakers exploit loopholes to dodge high U.S. taxes
U.S. drugmakers benefit enormously from policies that force Americans to pay far more for prescription drugs than do people abroad. The companies benefit, to the tune of $12 billion a year, from the fact that Medicare isn’t allowed to bargain over drug prices. They benefit from American laws governing securities and intellectual property. They benefit from a highly educated workforce. And they benefit from a highly respected federal system for testing and approving new drugs.
But when these same companies are asked to pay their U.S. taxes, they complain bitterly about high rates. Some go so far as to merge with a smaller foreign company so they can “move” their headquarters to a country with a lower corporate tax rate.
In the latest and most outrageous of these deals, Pfizer has agreed to acquire Ireland-based Allergan in a $160 billion transaction designed to avoid U.S. taxes on certain income. Allergan, best known as the maker of Botox, has absorbed two other American drug companies: New Jerseybased Actavis PLC and New York-based Forest Laboratories.
When combined with Pfizer, the new company will be about as Irish as a ship sporting a Liberian flag is actually Liberian.
Big Pharma is also notorious for finding other ingenious ways to circumvent U.S. taxes, often by creating subsidiaries in foreign tax havens to house their patents. The subsidiaries lease the use of the patent back to the parent company, so much of the company’s profits are booked in low-tax havens, even though much of their business is back home in the US.A.
According to the Institute on Taxation and Economic Policy, Pfizer has been particularly adept at setting up overseas shell companies. The company lists 151 subsidiaries in places such as Ireland, Luxembourg, Holland, the Channel Islands and the Cayman Islands. It has used them to man- ufacture paper losses in the United States, though this is where it can sell its drugs for the highest markups.
Ultimately, the blame for these legal, though hardly patriotic, tax ruses falls less on companies that are acting in shareholders’ interests than on a Congress that allows these tax games to occur.
If Congress wants to do something constructive for a change, the simplest and most obvious thing to do is to fix the corporate tax code so it collects a reasonable amount of revenue but doesn’t encourage companies to engage in elaborate schemes to lower their bills.
The 35% top federal rate is too high. And the code’s myriad tax breaks encourage companies to focus time and energy on tax avoidance instead of their core businesses. The rate could be lowered to the mid-20s simply by eliminating most of the tax breaks.
Additionally, Congress needs to enact laws specifically targeting so-called inversions and other tax dodges. The Treasury Department has been feverishly trying to toughen its rules but is limited by what the law allows.
The actions of companies such as Pfizer are very much the result of the inaction of Congress. Until that changes, the erosion of America’s tax base will be a bitter pill to swallow.