Drug Makers Benefit From Holding Patents Overseas

Reuters is reporting that pharmaceutical companies may be shifting the amount of taxes they owe in the United States by holding their valuable drug patents overseas.

When the Trump administration cut the corporate tax rate to 21% from 35% with the approval of the Tax Cuts and Jobs Act, the rationale for the cut was putting a halt to outsourcing and providing an incentive for companies to keep businesses and jobs within the United States. However, drug companies like AbbVie, indicated Reuters, may be using loopholes within the law to profit from the change.

Richard Gonzalez, AbbVie’s CEO, told investors earlier this year that, due to the tax cut (which requires only profits reported by domestic subsidiaries to pay US tax), the company expects its tax rate to fall to 9% on a projected revenue of $32 billion.

Despite basing most of its research facilities in the United States, Reuters indicates that AbbVie has never recorded a profit in the United States and has reported its income in lower-tax jurisdictions, in part due to holding 88 patents for adalimumab (Humira) in Bermuda, a country that does not tax corporate profits.

In 2017, AbbVie reported $10.4 billion of foreign profits before taxes on an international revenue of $9.97 billion. Conversely, from 2013 to 2016, AbbVie reportedly paid around $1 billion a year in taxes in the United States when it took earnings reported by foreign subsidies back home to cover expenses from US-based facilities.

To avoid such profit-shifting, the government attached a provision to the Tax Cuts and Jobs Act called Global Intangible Low Tax Income (GILTI). The provision states that if a company profits from a so-called tax haven, it will be liable to have the profit taxed as income generated in the United States. However, the tax rate that applies is only half the US tax rate.

Though the exact process utilized by AbbVie to report such low tax rates is not disclosed to the public, analysts and academics within the field have noted that corporate filings often show drug companies reduce taxes by holding patents in a low or zero corporate tax country. Using this method, the affiliate companies which manufacture or market the drug pay the tax haven subsidiary royalty fees for the right to use the patent.

AbbVie is not the only pharmaceutical company benefitting from the new tax law. Amgen has reported a 14% to 15% tax rate for 2018, comparable to 17% for Pfizer and 18% for Eli Lilly.