‘Drug Makers Reap Benefits of Tax Break’

NY Times: “Drug Makers Reap Benefits of Tax Break,” by Alex Berenson, May 8, 2005.

We have posted before about the rapacious tax breaks that the White House and Republican majority in Congress seem slavering to give American corporations, as this piece from early February makes clear.

And we have also talked about how crucial the visible collapse of the American health care system SHOULD be in our politics.

So imagine our utter LACK OF SURPRISE when we saw the two put together on the front page of the Mother’s Day Times, in a headline entitled “Drug Makers Reap Benefits of Tax Break.”

Of course, we had a pretty clear idea of what that was doing there, but, once again, it was just so sad to see yet another crucial article just lying there, like a beached whale …

That said, it really is excellent, and so we hope we can rescue it from the oblivion it so richly does NOT deserve (bold emphasis mine):

A new tax break for corporations is allowing the biggest American drug makers to return as much as $75 billion in profits from international havens to the United States while paying a fraction of the normal tax rate.

The break is part of the American Jobs Creation Act, signed into law by President Bush in October, which allows companies a one-year window to return foreign profits to the United States at a 5.25 percent tax rate, compared with the standard 35 percent rate.

Any company with profits in other countries can take advantage of the law, but drug makers have been the biggest beneficiaries because they can move profits overseas relatively easily, independent analysts say.

In this way, the drug companies are just like the oil companies, who, during the 50s and 60s, perfected the art of legal tax evasion in precisely the manner Big Pharma is doing now. See Lecture 16, “The Age of OPEC” for a detailed analysis of how the oil companies developed this apparently much-beloved corporate strategy.

The money the companies are bringing home has come from many years of using legal loopholes in the tax law to aggressively shelter their profits from United States taxes, tax lawyers say. While the companies’ tax returns are private, fragmentary information about their tax payments is buried inside their annual financial statements.

Those figures show that the drug makers have told the Internal Revenue Service for years that their profits come mainly from international sales, even though the prices of medicines are far higher in the United States and almost 60 percent of their sales take place in America.

Yes, you read that right …

Though the companies stand behind their accounting, financial analysts and tax lawyers say that the drug makers’ claim defies reality and that their profits come mostly from sales in the United States. But the I.R.S. lacks the resources to challenge the companies effectively, the analysts and lawyers say. As a result, the six major companies – Pfizer, Johnson & Johnson, Merck, Bristol-Myers Squibb, Wyeth and Lilly – collectively pay a federal tax rate of less than 15 percent on their worldwide profits, with some companies paying much less.

Already, four of the six drug makers have collectively announced plans to return $56 billion in profits to the United States. Two others say they are still considering but could repatriate an additional $18 billion. Had the six companies faced standard federal taxes on those profits, they would have paid $26 billion to the United States. Instead, they will pay less than $4 billion. Chris Senyek, an accounting analyst at Bear Stearns, said drug companies would probably make up about half of all the money repatriated by publicly traded companies.

Think about THAT when you’re doing YOUR taxes …

During this window, returning money to the United States is to the advantage of the companies because they can spend the cash here rather than having to use it overseas as tax laws generally require. Lawmakers have said their main intention for the law was to encourage American companies to build new operations and hire workers. …

Although the act is intended to create jobs, Pfizer said last month that it would cut its annual costs by $4 billion over the next three years. Pfizer, which will repatriate at least $28 billion under the act, did not say how many jobs it planned to eliminate, but analysts expect the company to shrink its work force by thousands of people. Mr. Senyek said the law would create an insignificant number of jobs because companies can easily work around provisions in the law meant to stop them from using the money for dividends to shareholders rather than new hiring.

After the break expires, companies will probably go back to stockpiling profits overseas as they wait for another tax holiday in a few years, tax lawyers say.

Happy Mother’s Day to YOU, Moms of America !!!

The major drug makers use a variety of complex but legal tactics to move profits from the United States to low-tax countries like Ireland and Singapore where they have large manufacturing operations, said H. David Rosenbloom, director for the international tax program at New York University Law School.

“The law is complicated, but what’s going on is perhaps less complicated,” he said. “They’re doing everything they can to maximize their profit in Ireland and minimize the profit in the countries where the sales occur.”

Again, this is similar – although not identical – to the way the oil companies would declare their profits at the LEAST profitable spot in their vertically integrated operations – usually, at the pump, where the margins are smallest, compared especially to the drilling / refining / shipping stages.

Cool, huh ???

The government can challenge the way the companies allocate their profits internally. But the companies have usually been able to defeat the I.R.S., Mr. Rosenbloom said.

“There’s a limit to what they can do, because these cases are huge. They’re very expensive,” Mr. Rosenbloom said of the I.R.S.. …

Because they report relatively low United States profits, the companies pay little in American taxes compared to their profits. Pfizer reported paying only $1.2 billion in state and federal income taxes in 2004, 9 percent of its worldwide pretax profit. Excluding a one-time payment related to its plans to repatriate money it has sheltered overseas, Lilly reported paying just $37 million in state and federal taxes last year, only 1 percent of its worldwide pretax profit.

Something, eh ??? Quite a racket, wouldn't you say ???

Collectively, the six drug makers paid about $6 billion in federal and state taxes, a fraction of their pretax worldwide profits of $43 billion. Johnson & Johnson accounted for about half the American taxes paid. It garners more than half of its sales from consumer products and medical devices, whose profits are harder to transfer overseas.

The companies’ assertions that they are more profitable overseas than in the United States is hard to believe, said Dr. Alan Sager, director of the health reform program at the Boston University School of Health.

Prescription drug prices are far higher in the United States than in other industrialized countries, where prices are generally government-controlled.

And WHO has a problem with a single-payer system ???

“I’m really at a loss to find a reasonable explanation for the phenomenon, a real-world explanation,” Dr. Sager said. Outside the United States, “there just doesn’t seem to be any place on earth for the high profits to be generated, which leaves us with the extraterrestrial options.” …

David Moskowitz, an analyst at Friedman, Billings, Ramsey, estimated that at least 60 percent of the drug industry’s worldwide profits come from the United States. Higher American drug prices more than make up for higher marketing costs here, he said. Other analysts estimate that as much as 75 percent of the industry's worldwide profits are generated in the United States.

But companies can hide those profits from the I.R.S. by moving their drug manufacturing overseas, said Martin A. Sullivan, contributing editor of Tax Notes, a nonprofit journal that examines tax issues. Companies transfer drug patents to their own foreign subsidiaries, he said.

The subsidiary then helps pay for research on the drug. If the medicine is approved for sale in the United States, the subsidiary manufactures the drug for a few cents a pill.

The pills are then shipped to the United States, where they are sold to a pharmacy or a wholesale company for several dollars each. But the parent company claims that almost all the profit should go to the subsidiary, not to the parent in the United States.

“Then the name of the game is to have that foreign subsidiary pay as little as possible back to the United States for the rights to all that income,” Mr. Sullivan said.

The oil companies are CLEARLY excellent teachers … taken right from their playbook …

The law will encourage drug makers to become even more aggressive about shifting American profits overseas because the companies will assume that they can lobby Congress for another tax holiday in a few years, said Sheldon Cohen, senior counsel at Morgan, Lewis & Bockius.

“I’ve always been against tax holidays or amnesties on the basis that if we do this, it tells companies or individuals that we’ll do it again,” Mr. Cohen said.

Some friends have gently reproached me for doing too much quoting, and not enough of my own commentary here …

While I appreciate where they’re coming from, I also feel that sometimes the most eloquent approach, depending on the piece at hand, is simply SILENCE …

And this piece MORE than speaks for itself … I just hope we can play a role in making sure it’s not lost forever …

That said, people wonder why medical costs are so high in this country ??? Please.

And as Gerald so often says, “where are the fucking Democrats ???”

Good question …