Big pharma quietly pushes back on global tax deal, citing covid-19 role4 min read . Updated: 27 Jul 2021, 10:20 PM IST
- Drug companies mobilize in D.C., arguing competitiveness and agility are at stake
Big drug companies and their lobbyists have a message for Congress: Don’t raise taxes on the industry that brought you fast-tracked Covid-19 vaccines.
Pharma executives, lobbyists and consultants are mobilizing to fight what has become a threat to drug companies’ bottom lines: a sweeping agreement by many of the world’s biggest economies to better harmonize corporate taxation around the globe. Earlier this month, 130 countries agreed to broad outlines of a deal that would, among other steps, establish a minimum corporate tax of 15% within their countries, reducing opportunities for international tax avoidance.
The yearslong effort accelerated in recent years as a way to more equitably tax U.S. tech giants. Many of those companies have said they support the deal because it simplifies taxes around the world, even if it will raise their tax bills.
Big pharmaceutical companies, however, are quietly pushing back against the overhaul. The effort comes at the same time the industry is fighting U.S. proposals to cut drug prices. Lawyers and company officials estimate the tax overhaul, if adopted, could cost some of the biggest pharmaceutical companies hundreds of millions of dollars more each year.
That has set up a fight in Congress and in Europe. In private industry meetings and discussions with congressional staffers, drug company executives and lobbyists are seeking to use the industry’s pandemic role as leverage, according to people familiar with the effort. “We led the world in responding to this pandemic," is how one drug-company executive described a key industry message.
“There certainly is a halo from Covid," said Ipsita Smolinski of U.S. healthcare-policy consulting firm Capitol Street. What isn’t clear is how much that might protect drug companies from the global momentum for higher taxes. “I think that halo will wear off," she said.
U.S. companies Johnson & Johnson and Pfizer Inc. have taken a lead role in some of the discussions, people involved say. Pfizer, the New York-based company that delivered a leading Covid-19 vaccine with Germany’s BioNTech SE, has joined peers warning in Washington that higher taxes could weaken U.S. companies and make them vulnerable to foreign takeovers, according to people familiar with the communications.
The Pharmaceutical Research and Manufacturers of America, a trade group, says it doesn’t engage in discussions over broad changes to tax policy, but a spokesman said the group’s members are ‘“aware of the impact that both significant tax changes and extreme drug pricing changes may have on our country’s global competitiveness."
Pharmaceutical companies are particularly vulnerable to proposed tax changes because they have global operations that sell products around the world. And like big tech companies, many spend large sums on research and development and currently pay taxes where operations are based or where they have parked key intellectual property. Like Silicon Valley, many drug companies have complex structures that favor lower-tax countries.
“Pharma has done a lot of tax planning and has put a lot of intangibles into tax havens," said Richard Collier, who teaches international tax law at the University of Oxford and advised on the global tax framework. The bottom line for the industry, he said, is: “The ground has shifted for the worse."
Drug companies also benefit from government subsidies and other sweeteners to attract jobs and research, some of which could remain out of reach of tax overhauls.
Over the past decade, the world’s 20 largest pharmaceutical companies reported a global effective tax rate of about 17%, compared with about 21% for the world’s 20 biggest tech companies—both lower than rates reported by very large companies in other sectors, excluding China, according to an analysis for The Wall Street Journal by New York University finance professor Aswath Damodaran. The effective tax rate is an estimate of a company’s tax liability as a percentage of income. It can differ from what a company actually ends up paying.
By other measures, the analysis shows pharma and tech are less unusual, paying roughly the same as other sectors in taxes as a percentage of market capitalization—and more as a percentage of revenue. Contrasts stem in part from heavy tax breaks for research.
Individual companies vary widely in effective tax rates. J&J reported effective tax rates of 10.8% and 12.7% in 2020 and 2019, respectively.
According to Prof. Damodaran’s analysis, Pfizer’s effective tax rate over the past decade was 5.8%, the lowest of the biggest drug companies. One factor was a big tax-related gain Pfizer took in 2017 tied to the U.S. tax overhaul that year, resulting in a negative reported tax rate by global accounting standards. Pfizer reports a so-called adjusted effective tax rate that excludes one-time charges and which the company describes as reflective of ongoing operations. That adjusted rate is about 15% this year.
Pharma executives and lawyers say they want certainty and simplicity and warn higher taxes could crimp the sort of risky research and development that led to the quick deployment of Covid-19 vaccines and pandemic therapies. “Pharma is going to get hit hard," said a senior tax official at J&J who has been closely involved in policy talks. J&J makes another Covid-19 vaccine authorized for use in the U.S. Companies will have less to invest in research and development, the official said.
The industry’s outsize investments in research and development are “foundational to human health and well-being, as demonstrated throughout the Covid-19 pandemic," a J&J spokesman said. If tax changes cut research spending, he said, it will bring “a negative impact to new medicines, vaccines and treatments."
This story has been published from a wire agency feed without modifications to the text
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