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Senators encourage the repatriation of offshore funds in a new report targeting the pharmaceutical industry.
The United States Treasury Department introduced policy in September 2014 to discourage companies from merging with foreign companies in another fiscal jurisdiction to escape tax responsibilities. The policy was enacted to make inversion more difficult and to curb a company’s acquisition of a related foreign company for the sole purpose of avoiding United States corporate tax rates.
Although pharma has capitalized on foreign tax benefits in the past, there may now be an opportunity for the industry to free up some of its foreign capital trapped overseas, thanks to a bipartisan working group initiative launched by US Senator Rob Portman (R, Ohio) and US Senator Charles E. Schumer (D, New York). On July 8, 2015, the working group released details of an attack plan for comprehensive, international tax reform. A striking 80% of global purchasing power currently resides outside of the US, according to a press release from Sen. Portman’s camp, and the working group would like to see some of that money make its way back into the states. Although the plan encompasses tax policy that could affect various industries, pharmaceutical companies may be particularly interested in the proposed tax law policy changes as they relate to patents and the push for repatriation of tax dollars back into the US.
To help make the US more competitive, “both the President's budget proposal as well as Chairman Camp's tax reform proposal would impose a one-time transition toll charge at a rate significantly lower than the statutory corporate rate,” the report noted. Additionally, “Chairman Camp’s draft provides a bifurcated rate structure with a lower tax rate on ‘non-cash’ holdings to account for the fact that many companies have reinvested a significant part of their foreign earnings in hard, brick-and-mortar assets. In addition, both proposals allow the toll charge to be paid ratably over a number of years, provide a tax credit for foreign taxes paid, and specify that certain associated one-time revenues will be used for investment in transportation infrastructure.”
In addition, the report calls for a "patent box," or a special low tax rate for income derived from patents or other intellectual property, a move that could provide an industry incentive for “the development and ownership of IP in the United States, along with associated domestic manufacturing,” according to a summary of the report.
Pharma’s inversion to foreign corporate tax homes hurts US businesses and takes jobs out of the country, said the senators, who cited the recent attempted acquisition of Cosmo Pharmaceuticals by Salix as an example of how foreign tax havens can hurt the US economy. In the aforementioned transaction attempt, Salix called off a deal to acquire Cosmo after it determined the deal would not be beneficial following the passage of the new tax laws. A bidding war for a vulnerable Salix then followed, and Valeant, a company with a tax domicile in Canada, acquired Salix. Shortly after the Salix acquisition, Valeant laid off one-third of Salix’s workforce in its Raleigh, North Carolina location, the report asserted.
A similar initiative to repatriate foreign monies was launched more than 10 years ago via the American Jobs Creation Act (AJCA) of 2004. Although the main purpose of that plan was the reinvestment of repatriated dividends into “worker hiring and training, infrastructure, research and development, capital investments, and the financial stabilization of the corporation for the purposes of job retention or creation,” in some cases, the opposite situation occurred. Within two years of the repatriation, Pfizer eliminated 10,000 jobs, according to Americans for Tax Fairness. Repatriated funds went to salary increases to senior executives and stock buybacks instead of to hiring efforts, according to the Senate report, which noted that “from 2002 to 2007, according to data supplied by the corporations, compensation for the top five corporate executives at the top 15 repatriating corporations increased the most after corporations repatriated offshore funds.” Of the top 15 companies repatriating funds to the US after the AJCA, six were pharmaceutical companies. Pfizer repatriated the most capital to the US of the 15 top companies, with a total of approximately $37 billion coming back.
Sen. Rob Portman