Side effects

American drug companies don’t want to pay US taxes—but they want global customers to pay US drug prices

June 3, 2014
Obsession
Borders
June 3, 2014

Pfizer’s bid to purchase AstraZeneca failed, but the company’s attempt to move to London in an effort to avoid US corporate taxes has inspired a new round of commentary on America’s corporate tax system. Perhaps it should also spur a look at America’s commitment to raising drug prices around the world.

The US taxes the global income of its companies, which has led many of the largest to keep profits overseas indefinitely to avoid paying Uncle Sam, and even shift US profits overseas to avoid public levies. So-called “inversions”—reverse mergers where a US company buys a foreign one and assumes their jurisdiction, as Pfizer proposed—have also become more popular. Four US pharmaceutical companies have used the tactic to go overseas in the last year, and four more are considering similar moves.

While some US lawmakers have proposed a deal that would (paywall) block inversions as part of a strategy to lower taxes—a corporate practice that forecasters say would otherwise cost the US $20 billion in lost tax revenue over the next decade—many multinational companies argue that the US should simply end taxation of overseas income. Gary Hufbaeur, a senior fellow at the Peterson Institute for International Economics, lays out their argument:

[Multi-national companies] must incur huge research and development (R&D) costs and other investment outlays to stay competitive. To recover these costs and earn a decent profit, they must produce and sell in world markets. As part of their growth strategies, many countries—not just Ireland and Switzerland, but also India and China—tailor their tax laws to attract MNC factories, service centers, and research facilities.

It’s worth noting off the bat that those R&D investments are typically written off the tax bill—while the US R&D tax credit (designed to foster US innovation and create skilled jobs) isn’t permanent, it has been consistently renewed since its inception. It is certainly true, however, that other countries are offering multinational companies tax perks to attract their investment.

But even as companies flee US taxes, the country serves American companies by negotiating for something they fervently desire to profit abroad: US intellectual property law as a global benchmark.

When it comes to pharmaceutical companies, this is particularly important: Absent a global intellectual property regime, companies face market-by-market battles against competitors eager to reverse-engineer their products and sell them for cheap. They are already under pressure from emerging markets, which make many of the ingredients for medicines around the globe and have questioned why their people are paying so much for the drugs that are produced.

So who is fighting for the right of pharmaceutical companies to sell their wares at their prices, wherever on earth? Why, that same Uncle Sam that companies are avoiding paying taxes to: The Obama administration is negotiating the Trans-Pacific Partnership, which would expand US free trade rules to eighteen countries around the Pacific rim, as well as a free trade deal with the European Union. In both, the US is pushing for “harmonization” of patent laws—including longer exclusivity for existing patents, limits on the release of drug data, restrictions on how government health care programs can control drug prices—all of which mean higher prices for medicines. It’s no wonder that pharma is the most active lobbyist when it comes to trade talks.

This US push has negotiating partners, as well as American progressives, up in arms—even Europe, where national health care systems are major drug buyers, doesn’t do as much to defend its pharmaceutical companies’ prices around the world. The US domestic market is what allows it so much leverage—even Pfizer gets 40% of its revenues from within the US.

But if efforts to adjust US tax policies for companies operating in the rest of the world are driving Pfizer and its ilk to abandon the country, one wonders how long US efforts to “harmonize” drug prices around the globe will continue.

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