Wyden's Pharma Probe Could Build Case For Int'l Tax Reforms

Introduction

In a significant move to address the growing concerns over corporate tax evasion, Senate Finance Committee Chairman Ron Wyden has intensified his investigation into the tax planning strategies of major U.S. pharmaceutical companies. This probe, which began in 2021, aims to uncover the extent to which these companies have exploited loopholes in the 2017 Tax Cuts and Jobs Act to minimize their tax liabilities. The findings of this investigation could have far-reaching implications, potentially paving the way for international tax reforms designed to ensure fairness and transparency in corporate taxation.

The Investigation: A Deep Dive

The Senate Finance Committee, under Chairman Wyden's leadership, has been scrutinizing the tax practices of major U.S. pharmaceutical companies, including Pfizer, AbbVie, Amgen, Bristol Myers Squibb, and Merck. The focus is on how these companies have utilized offshore subsidiaries and other tax avoidance techniques to reduce their effective tax rates.

One of the key aspects of this investigation is the impact of the 2017 Tax Cuts and Jobs Act. This legislation significantly reduced the corporate tax rate from 35% to 21%, while introducing the Global Intangible Low-Taxed Income (GILTI) provision. GILTI targets U.S. companies that own more than 50% of foreign corporations and generate income from intangible assets, such as copyrights and patents, in low-tax jurisdictions. The provision taxes this income at an effective rate ranging from 10.5% to 13%, which has been a major factor in the reduced tax rates of these pharmaceutical companies.

Pfizer Under the Spotlight

Pfizer, one of the largest pharmaceutical companies globally, has been a particular target of Chairman Wyden's scrutiny. An analysis of Pfizer's SEC filings reveals that the company's effective tax rate plummeted by 75% following the passage of the 2017 Tax Cuts and Jobs Act. This drastic reduction is attributed to Pfizer's practice of booking most of its earnings offshore, taking advantage of lower tax rates in foreign jurisdictions. Despite generating over $364 billion in sales over the last six years, Pfizer paid an effective tax rate of just 5.4% in 2019 and 2020, which is significantly lower than the U.S. corporate tax rate of 21%.

Tax Avoidance Techniques: A Common Practice

Big Pharma companies have consistently used aggressive tax avoidance techniques to minimize their tax liabilities. These strategies include:

• Offshore Subsidiaries: Many of these companies have established complex networks of offshore subsidiaries to book profits and avoid U.S. corporate taxes. For example, a major U.S. drug company generated 75% of its sales to U.S. consumers but booked 99% of its taxable income in offshore entities located in Bermuda and elsewhere.

• Transfer Pricing: Companies like Pfizer use transfer pricing to manipulate the value of goods and services transferred between entities in different countries. This practice allows them to allocate profits to low-tax jurisdictions, thereby reducing their overall tax burden.

• Tax Incentives: Big Pharma companies have secured tax incentives in various countries, including Puerto Rico and Singapore. These agreements often extend for decades, providing a stable platform for minimizing tax liabilities.

Wyden's Concerns and Demands

Chairman Wyden has expressed deep concern over the widespread use of these tax avoidance techniques by Big Pharma companies. He has repeatedly emphasized that the 2017 Tax Cuts and Jobs Act was a "massive giveaway" to multinational corporations, resulting in a significant decline in the average effective tax rate of U.S. pharmaceutical companies from 19.6% to 11.6% between 2014 and 2020.

Wyden's latest actions involve probing Pfizer's international tax practices, particularly given the company's significantly lower effective tax rates compared to the U.S. corporate tax rate. He has sent a letter to Pfizer CEO Dr. Albert Bourla, demanding detailed information on the company's tax and earnings practices. The senator is seeking documents that could shed light on tax incentive agreements in Puerto Rico, Singapore, and potentially Ireland. Despite this, Pfizer has refused to comply with the committee's investigation, which has heightened concerns about the company's use of profit-shifting techniques to avoid paying billions of dollars in taxes on U.S. prescription drug sales.

Broader Implications and Future Reforms

The findings of Chairman Wyden's investigation could have broader implications for international tax reforms. The practice of profit shifting and the exploitation of loopholes in the current tax system are not unique to Big Pharma. However, the magnitude and transparency of these practices in the pharmaceutical industry make it a prime example for addressing corporate tax evasion.

Chairman Wyden has been vocal about his intention to fix the international tax code and crack down on tax gaming by multinational corporations. He believes that ensuring corporations pay a fair share of taxes is essential for maintaining a balanced tax system. The decreased tax burden on Big Pharma, particularly when compared to middle-class families, has been a recurring theme in his remarks. He has emphasized that the current system allows these companies to charge high prices for prescription drugs while paying minimal taxes.

Conclusion

The ongoing investigation into Big Pharma's tax practices by Chairman Ron Wyden is a critical step towards addressing the systemic issues in corporate taxation. The findings of this probe could fuel efforts to revamp international tax laws, ensuring that multinational corporations contribute fairly to national coffers. As the world grapples with rising healthcare costs and economic inequality, the need for transparent and equitable taxation practices has never been more pressing. Chairman Wyden's determination to expose the loopholes exploited by Big Pharma underscores his commitment to fiscal responsibility and fairness.

References

• Wyden Expands Big Pharma Tax-Avoidance, Profit-Shifting Investigation with Pfizer Inquiry. KTVZ, May 21, 2024.
• Wyden Puts Pfizer in Hot Seat with CEO Letter in Ongoing Senate Tax Investigation. FiercePharma, May 21, 2024.
• Wyden Releases New Findings in Ongoing Pharma Tax Investigation. Senate Finance Committee, May 11, 2023.
• Pfizer Under Scrutiny: US Senate Finance Committee Intensifies Probe into Big Pharma's Tax Practices. TPA Global, September 9, 2024.
• Wyden Demands Pfizer's Compliance with Committee's Pharma Tax Investigation. Senate Finance Committee, October 10, 2024.