The Senate Finance Committee examined the impact of the Tax Cuts and Jobs Act on pharmaceutical makers' taxes and found the law enabled some of the biggest companies to lower their tax bills by shifting profits abroad.
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"When most Americans travel to some faraway land, they get a sun tan," said Senate Finance Committee chairman Ron Wyden, D-Oregon, in his opening statement at a hearing Thursday. "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."
The study found that from 2014 to 2016, the industry paid an effective tax rate of 19.6% on average. After passage of the TCJA, it paid only 11.6% in 2019 and 2020.
Large pharmaceutical companies are reporting 75% of their taxable income comes from foreign subsidiaries, a far larger share of offshore income compared to non-manufacturing multinational companies (22%) and manufacturers outside the pharmaceutical industry (45%).
The Internal Revenue Service is challenging some of the pharma companies' profit-shifting strategies, including Amgen's. The IRS claims the drug maker inappropriately shifted $24 billion in income to subsidiaries in Puerto Rico, which is treated as foreign for tax purposes.
In addition to Amgen, the study also looked at the effective tax rates of other major pharma companies like Abbott, AbbVie, Johnson & Johnson, Merck and Pfizer.
Republicans defended the law, pointing out that international tax provisions such as the GILTI (global intangible low-taxed income) regime reduced the prevalence of corporate inversions, in which multinational companies change their tax addresses to low-tax countries.
"Almost eight years ago — before the Republican-enacted Tax Cuts and Jobs Act — this committee's bipartisan working group concluded: our international tax system was 'clearly broken,'" said Sen. Mike Crapo, R-Idaho, the ranking Republican on the committee. "Inversions were on the rise, used as a defensive strategy by U.S. companies to fend off foreign takeovers. "Mr. Chairman, you rightly observed this 'inversion virus' was 'multiplying every few days.' Ironically, the bipartisan report cited the pharmaceutical industry to illustrate how the pre-TCJA tax code made 'U.S. companies more valuable in the hands of foreign acquirers.' In seeking to put TCJA on trial, today's hearing ignores facts that have flipped the competitive edge in our favor. Fact: TCJA completely cured the inversion virus."
He complained about moves by the Biden administration to raise taxes on multinational corporations through the Organization for Economic Cooperation and Development's initiatives for a global minimum tax of 15%.
"Without consulting Congress, much less obtaining its consent, it collaborated with the OECD on a cartel-like global tax code with a trilogy of new taxes, which appear to put America last," said Crapo. "The first piece mandates a global minimum level of tax on large companies. The U.S. already has one, thanks to TCJA. But, at our own administration's urging, it was not deemed good enough for the new world tax order."
The senators also heard from a panel of tax experts who expressed views on both sides of the issue. "Most of America's leading pharmaceutical companies currently have structured their businesses to shift profits from their U.S. sales to their offshore subsidiaries, in order to shift profits abroad," said Brad Setser, a senior fellow at the Council on Foreign Relations. "Many of these companies have offshored production and jobs at a real cost to our biopharmaceutical manufacturing base. Tax avoidance by American pharmaceutical companies is also a very solvable problem. Straightforward changes to the U.S. Tax Code would encourage American and global pharmaceutical companies to onshore rather than offshore their global profit and to produce more patent-protected pharmaceuticals in the United States."
The annual financial reports of the six largest U.S.-listed pharmaceutical companies showed they reported $215 billion in U.S. revenue in 2022, but reported earning only $10 billion in U.S. profits, he noted. The same companies generated $170 billion in revenue abroad and reported $90 billion in profits.
"Of the $100 billion in global profits earned by American Pharmaceutical companies in 2022, they appear to have paid about $2 billion to the U.S. Treasury," said Setser. "The U.S. trade data tells the same story. The U.S. now runs a massive trade deficit in pharmaceuticals, largely with countries like Ireland, Singapore, Belgium and Switzerland. Major U.S. pharmaceutical companies have announced significant new investments in Irish production, often explicitly for the U.S. market. Given that the Tax Cut and Jobs Act only reinforced prior incentives to offshore pharmaceutical production and profits, I unfortunately do not think it is unfair to call the tax cuts and Jobs Act, the Pharmaceutical Tax Cuts and Irish Jobs Act."
Daniel Bunn, president and CEO of the Tax Foundation, argued that the changes in the global tax rules from the OECD would hurt U.S. companies and should be resisted.
"Washington's attention is understandably on the debt ceiling, but unless we protect the nation's tax base, it will make our efforts to achieve fiscal sustainability that much harder," he said. "Today, if you're concerned about U.S. companies paying a certain amount of tax to the U.S. government on their foreign profits, then you should focus on what the U.S. Treasury Department has agreed to at the OECD, which directly reduces the amount of taxes U.S. companies would pay to the U.S. government on their foreign operations. Other countries, particularly in Europe, have often eyed U.S. companies with the desire to tax their profits. There was bipartisan concern in this committee when the digital services taxes were introduced, exposing U.S. companies to extraterritorial taxation. Now, the current global minimum tax rules do just that: they expose U.S. companies to extraterritorial taxation."
Diane Ring, a professor at Boston College Law School, said the Tax Cuts and Jobs Act dramatically reduced U.S. corporate tax rates and pursued a mixed policy of exemption and current taxation of foreign income that failed to end significant profit shifting.
"New tax rules rewarded U.S. businesses for making investments offshore," she added. "The GILTI regime was introduced as a floor or a minimum tax on the most mobile of U.S. multinationals' foreign income. However, notable design features severely hampered its ability to function as a meaningful minimum tax, a costly failure given the significant reduction in corporate tax rates, and the even lower U.S. rate of tax on much foreign income."
She believes that GILTI will nevertheless serve as a springboard for the international tax authorities to agree to the global minimum tax in the OECD's Pillar Two framework.
"In that way, the vision articulated by the U.S. designers of the GILTI regime in 2017 — a minimum tax to curtail serious profit shifting — was one that more than 140 countries ultimately signed onto and tried to improve upon," she said. "Not surprisingly any agreement in the tax and fiscal arena involving over 140 jurisdictions will inevitably entail compromises and complexities, but the feat is notable as we can appreciate, given the challenges domestically in reaching bipartisan agreement on budgets and debt limits. That said, the most recent Pillar Two guidance released in February 2023 has furthered key U.S. objectives in the design of Pillar Two rules."
William Morris, PwC's deputy global tax leader, said the desire on the part of market countries to tax global profits that gave rise to the Pillar One part of the OECD framework won't go away and needs to be addressed, whether or not it's broadly adopted. He noted that the Pillar Two part of the framework is now being implemented in the EU and a number of other countries.
"There are ways in which it disadvantages the United States, but opportunities do remain to address those issues and create a better functioning system," he added. "Finally, we need to find a balance between international cooperation and national sovereignty. Measures preventing conflicts between countries' tax systems are important, but so is the ability of each country to use their tax system to meet the needs of their citizens, including to foster economic growth, create jobs and protect national security."
