Senate Investigation Shows How GOP Law Enabled Big Pharma's 'Extreme' Tax Avoidance
The Senate Finance Committee released a new report Thursday detailing how the GOP's 2017 tax cut law allowed U.S. pharmaceutical companies to ramp up their tax avoidance schemes as they continued charging Americans exorbitant prices for prescription drugs.
Published as part of an ongoing investigation into the pharmaceutical industry's tax practices, the report cites new data showing that "75% of all Big Pharma income is reported offshore for tax purposes" even though much of their revenue comes from patients in the U.S.
To illustrate how the tax avoidance scheme works, the report offered this scenario:
"The U.S. customer buys the pharmaceutical product from a U.S. sales arm of the U.S. pharmaceutical company. That U.S. sales arm purchased the product from the offshore [controlled foreign corporation (CFC)] of that same pharmaceutical company. Little if any profit from the sale is left in the U.S. sales entity, and most of the profit is reported by the CFC... The CFC then is able to distribute that profit, generally tax-free, to its U.S. parent company. The profit makes a round trip—from the U.S. sales arm, to the offshore CFC, and then back to the U.S. parent."
AbbVie, one of the largest pharmaceutical companies in the world, reported 100% of its 2019 income as offshore for tax purposes despite making 72% of its worldwide sales to U.S. customers that year, according to the committee's findings. AbbVie's effective tax rate in 2019 was just 8.6%.
Sen. Ron Wyden (D-Ore.), the chair of the Senate Finance Committee, said in a statement that "Big Pharma gets us coming and going—they charge Americans sky-high prices and they pay absolute rock-bottom taxes, not anywhere near a fair share."
"It's simply appalling that multinational drug companies raking in many billions of dollars in profits are paying taxes at lower rates than middle-class families," Wyden added. "Democrats are focused on fixing our international tax code, cracking down on tax gaming, and ensuring corporations including Big Pharma pay a fair share."
"Big Pharma gets us coming and going—they charge Americans sky-high prices and they pay absolute rock-bottom taxes, not anywhere near a fair share."
The report argues that international provisions of the Tax Cuts and Jobs Act, which former President Donald Trump signed into law in 2017, "enabled Big Pharma’s continued shifting of profits overseas."
The committee's analysis points specifically to the GOP tax law's global intangible low-taxed income (GILTI) system, which imposes a 10.5% tax on the overseas income of CFCs. Ostensibly aimed at combating profit-shifting, expert critics argue the provision has actually encouraged it by setting the tax rate at less than half the U.S. corporate rate of 21%.
According to the Senate Finance Committee report, the Republican law's GILTI regime "significantly cut pharmaceutical companies' tax rate, sometimes into just single-digits, creating a huge incentive to put profit, investments, and jobs offshore."
"The industry's average effective tax rate is an astonishingly low 11.6%—a 40% decrease from years prior to the 2017 Republican tax law," the report notes. "In 2021, the effective tax rate of every single one of the seven largest pharmaceutical corporations in the United States was lower than 15%."
Between 2014 and 2016, prior to the enactment of the GOP tax law, the U.S. pharmaceutical industry paid an average effective tax rate of 19.6%.
The report emphasized that "even compared to other multinationals, Big Pharma's profit-shifting is extreme," surpassing that of "both non-manufacturing companies and manufacturers outside of the pharmaceutical industry."
Wyden, who presided over a hearing on the pharmaceutical industry's tax avoidance schemes on Thursday, said that "there's no question that the tax system was broken prior to 2017, but instead of fixing it, Republicans gave Big Pharma a green light for some of the most aggressive tax gaming highly trained accountants can dream up."
"Democrats warned in 2017 that the Republican tax law was going to amount to a massive giveaway to multinational corporations, and here's the proof that that's exactly what happened," said Wyden. "Republicans handed Big Pharma a 40% tax cut."
\u201cUS pharmaceutical companies charge Americans more than anyone else. They report generating the bulk of the revenue in the US.\n\nBut they apparently earn almost no (taxable) income in the United States. \n\nRather remarkable.\n\n1/\u201d— Brad Setser (@Brad Setser) 1683745689
The report spotlights Merck's cancer drug Keytruda—which carries a staggering list price of $175,000 per year—as a telling example of how U.S.-based pharmaceutical companies rip off American patients and then avoid paying U.S. taxes on the profits.
"Over the four years 2018-2021, the U.S. government has spent an astounding $12 billion under Medicare to help patients cover the cost of Keytruda, effectively subsidizing a major portion of Merck's profits for the drug," the report states. "Between 2019 and 2022 Merck sold $37.1 billion worth of Keytruda in the United States, yet little if any of the profits generated by those sales were taxed in the U.S."
"Rather, the profits from Keytruda sales to U.S. patients are taxed offshore, likely benefitting from the lower GILTI rate of 10.5%," the report continues. "Merck provided information indicating that this is because the IP rights for Keytruda are exclusively located in the Netherlands and the drug is manufactured in Ireland."
AbbVie uses similar tactics to slash its tax bill, holding IP rights in a subsidiary in Bermuda and making parts of its top-selling drug Humira in Puerto Rico.
"Since income from entities based in Puerto Rico is treated as foreign for tax purposes," the report notes, "income from Humira is taxed not at the U.S. corporate rate of 21%, but the much lower GILTI rate of 10.5%."
During his opening statement at Thursday's hearing, Wyden said that "when most Americans travel to some faraway land, they get a sun tan."
"When Big Pharma's profits travel overseas, they get a tax break. That tax break got a whole lot bigger as a result of the Republican reforms," said the Oregon Democrat. "The level of profit-shifting industry-wide is enough to leave you slack-jawed."