The U.S. is the most lucrative market for drugmakers, but they often pay more in taxes overseas.
Jim Watson/AFP via Getty Images
Tax day is here. While Americans are scrambling to file last minute returns, things are somewhat more complicated for corporations.
Corporations are supposed to pay a nominal tax rate of 21%. But in recent years, the biggest pharmaceutical companies had an average effective tax rate of less than 12%, according to an analysis by the Senate Finance Committee.
Why is that happening? Economist Brad Setser, of the Council on Foreign Relations, spent some time trying to understand it. He pointed to Pfizer as an example. “In a typical year, Pfizer reports losing money in the United States and making money abroad,” he says. “And as a result, in a typical year, Pfizer pays a lot more in tax outside the United States than it pays inside the United States.”
Moving money around
An NPR examination of financial records for the top five drug companies in the U.S. showed that in 2023, all but Eli LIlly reported losing money in the US.
However, drug companies make most of their sales in the U.S., thanks in large part to its unique health care system and the higher prices Americans pay for drugs. The top five American pharmaceutical companies all had more drug sales in the U.S. than they did in all the other countries in the world put together, according to Evaluate Pharma, which tracks pharmaceutical sales around the world.
Setster tried to explain how that translates to domestic losses when it comes time to pay taxes.
“How do they do it? You license your intellectual property to an offshore subsidiary,” Setser tells NPR. “You produce the high value-added active ingredients in a factory in Ireland or Singapore, and you pretend like the profit is accrued to these offshore subsidiaries, even though the sales are back to the United States.”
All of this is legal. Though to be sure, tax law is complicated. There are other nuances, such as acquisitions where the company being acquired had a lot of debt, that can contribute to lower tax rates for companies.
Generally speaking, however, investors in companies want them to get a good deal on their taxes and hang onto as much cash as possible.
The drug industry isn’t the only one that moves its income around to pay lower taxes, but the U.S. market’s role in driving the drug industry’s overall revenue makes the tax strategy stand out, says Ameet Sarpatwari, assistant director of the Program on Regulation, Therapeutics and Law at Harvard Medical School.
“These findings are striking because they show that the companies want to benefit from the high prices and the high sales in the U.S. market, but are doing everything possible to not contribute to the taxes that make that system and market function,” he says.
Pfizer gets a refund
Pfizer had an especially interesting tax year.
While Pfizer seems to be coming down from the pandemic-era revenue highs because of slower sales of its COVID-19 vaccine, the drugmaker’s revenues are still higher than before the pandemic with $58.5 billion in revenue for 2023, according to the company’s annual financial statement. And the vaccine is still among the top 10 best-selling drugs in the world, according to a study published in the journal Nature.
But the company is not paying any U.S. taxes for 2023 thanks to a negative effective tax rate. That’s in part because of restructuring charges and losses.
Pfizer told NPR it abides by the law and pays all taxes due.
Legislation would require companies to pay more
Recently proposed legislation seeks to limit the practice of moving profits offshore to pay lower taxes. Sen. Bernie Sanders, chairman of the Health, Education, Labor and Pensions committee, and Rep. Jan Schakowsky, a Democrat from Illinois, introduced a bill last Wednesday called the Corporate Tax Dodging Prevention Act. But whether it will become law is uncertain.
Changing the tax code is a tricky thing to do. Setser, a former Biden administration adviser, says he and his colleagues tried to do it a few years ago but weren’t successful.
The pharmaceutical and health product industry spent $381 million lobbying Congress in 2023 – more than any other industry that year, according to OpenSecrets, a nonpartisan nonprofit organization that tracks money in U.S. politics.
Source: npr