An insightful commentary (HJ Warraich, KA Schulman NEJM 2016; 374: 1005-7) provide some insight into “corporate inversion” or “tax inversion” and how they apply specifically to pharmaceutical companies. This article was prompted by Pfizer’s plans to merge with Ireland-based Allergan which would create the largest pharmaceutical company in the world, worth ~$160 billion.
- Inversions allow U.S. companies to lower their tax rate from as high as 35% (most never pay the full rate) to as low as Ireland’s corporate rate of 7.7%. While this seems like a sound idea, there are reasons why U.S. tax payers should be outraged:
- These firms “generate substantial revenue from purchases made by Medicare, Medicaid, and the Veterans Health Administration. These programs are supported by revenue from federal taxes — precisely the taxes companies are trying to avoid by inverting.”
- In fact, Medicare “parts B and D, received 76% and 80%, respectively of their funding from federal tax revenues in 2015.”
- These companies charge U.S. consumers much more than anywhere else in the world for their products. For Pfizer, for example, in 2013, two of its leading drugs (Enbrel and Celebrex) were twice as expensive in the U.S. as in the U.K.
- The U.S. government has pursued policies to protect these “domestic” industries in numerous trade agreements to secure intellectual-property rights.
- The National Institutes of Health has provided funding that supports the development of new pharmaceuticals.
What should be done?
- Policies to discourage inversion should be pursued.
- This could mean that Medicare and Medicaid should be given a free hand to negotiate drug prices with inverted companies or to require additional reviews to qualify their products.
- The FDA could withhold priority review from companies who have undergone inversion.
- The IRS could be allowed to levy exit taxes on inverting companies.
My take: Pharmaceutical companies want to extract billions of dollars of benefits from the U.S. taxpayers and charge U.S. consumers higher costs than anywhere else. Avoiding paying U.S. taxes is not business as usual and should be met with consequences.