Drug Makers Reap Benefits of Tax Break

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Sat, 07 May 2005 13:18:03 -0700

[Zepps_News] Drug Makers Reap Benefits of Tax Break - New

York Times

 

 

 

 

<http://www.nytimes.com/2005/05/08/business/08taxes.html?hp & ex=1115524800 & en=3eb\

550eb522fe198 & ei=5094 & partner=homepage>

 

Drug Makers Reap Benefits of Tax Break

 

 

By ALEX BERENSON

Published: May 8, 2005

 

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.

Jonathan Drake/Bloomberg News

 

Merck produces drugs in Singapore, where tax rates are lower.

Exporting Profits

 

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.

 

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.

 

Representatives of most of the big drug companies declined to comment

beyond their annual reports, but in a statement Eli Lilly noted that

several factors depressed its United States profits. Pfizer said it was

following the intent of the law.

 

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.

 

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. Congress passed the

law in response to pressure from the European Union to resolve a

long-running trade dispute.

 

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.

 

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. "

 

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.

 

The companies declined to discuss the specific strategies they use to

minimize taxes. But the result of their efforts can be seen in a

remarkable set of figures inside their annual financial reports.

 

[continued at website]

--

 

Election 2004

The Triumph of the Swill

 

" The National Government will regard it as its first and foremost

duty to revive in the nation the spirit of unity and cooperation.

It will preserve and defend those basic principles on which our

nation has been built. It regards Christianity as the foundation

of our national morality, and the family as the basis of national

life. "

Adolph Hitler, My New World Order,

Proclamation to the German Nation

at Berlin, February 1, 1933

 

 

Not dead, in jail, or a slave? Thank a liberal!

Pay your taxes so the rich don't have to.

 

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