Tuesday, June 19, 2018

The Tax-Fiddlers

The corporate tax cut passed by Trump and fellow Republicans that was in part designed to help dissuade U.S. companies from moving profits overseas may instead make the practice a lot more rewarding. Many big U.S. companies consistently report large domestic revenues while also reporting losses or relatively small profits at home. Such companies are among the biggest winners from tax reform.

That is because companies which shifted profits linked to U.S. sales, research or production previously had to pay U.S. taxes on the money at the rate of 35 percent when they brought those profits home. The new tax bill cuts the overall corporate tax rate to 21 percent, and allows income from overseas to be taxed at about half that rate – to as low as 10 percent.

AbbVie Chief Executive Richard Gonzalez told investors earlier this year that because of the change to a territorial system, whereby only profits reported by domestic subsidiaries face U.S. tax, the U.S. drugmaker expects its tax rate to fall to 9 percent this year from around 22 percent in recent years. That ranks among the lowest of the companies in the S&P 500 that have announced estimates for their tax rate, which average around 22 percent, according to Credit Suisse. The company has historically reported its income in lower tax jurisdictions, which is possible in part because AbbVie parks the majority of the patents for its top-selling drug in Bermuda - a country that has a zero tax rate on corporate profits. Despite recording over half its $28.2 billion in 2017 sales in the United States and basing most of its research facilities there, the Chicago company has never reported a profit in its home country, its annual reports show. The main driver for AbbVie, a rheumatoid arthritis treatment called Humira, generated more than $12 billion in sales in 2017 from patients in the United States, where the most common dose has a list price of about $60,000 a year.

In 2017, AbbVie reported foreign earnings before income tax of $10.4 billion on international revenue of only $9.97 billion. Yet, between 2013 and 2016 AbbVie had to pay around $1 billion a year of taxes in the United States, when it took the profits reported by foreign subsidiaries home to help cover expenses from its U.S. operations. In the future, it will not have to pay such taxes under the Tax Cuts and Jobs Act. The principal anti-tax avoidance measures introduced still allow companies to benefit strongly from profit shifting.

“If the guardrails in the new territorial system were meant to prevent companies from avoiding all taxes, AbbVie’s tax rate is a pretty clear signal that these guardrails may not be effective,” said Matthew Gardner, senior fellow with the Institute of Taxation and Economic Policy.

 Around two-thirds of those patents were assigned to the Bermuda subsidiary, AbbVie Biotechnology. Most of those patents were developed by teams of researchers entirely or somewhat based in the U.S., according to details in patent filings.

“This is the blueprint,” said Reuven Avi-Yonah, director of the International Tax at the University of Michigan Law School. “The illusion that you would see more patents kept in the U.S. under the new tax law is unreal as long as there are places you can keep them offshore where you pay 0.”

AbbVie is not the only U.S. company with big operations at home but which reports relatively few profits. Pfizer , Expedia, Boston Scientific Corp, Synopsys  and Microsoft  also do the same and are set to be big winners from the shift in territorial system, executives have said and earnings for the most recent quarter show.

Analysts and academics say corporate filings often show that drug companies frequently reduce their taxes by parking patents in a low-tax haven, as AbbVie does, and then have their affiliates - which manufacture or market the drug - pay the tax haven subsidiary royalty fees for the right to use the patent. This arrangement sees a drug sold into a target market, like the United States, at a high price, with the U.S. distribution arm getting a sales margin as low as 5 percent. Sometimes the U.S. distribution profit is not enough to cover group costs incurred in the United States. For example, many of AbbVie’s biggest costs - including $1 billion a year in interest charges and over $50 million in compensation for its top 5 executives - are covered by AbbVie’s U.S. entities, contributing to the U.S. loss, filings show. That is why AbbVie can forecast a tax rate below the 10.5 percent GILTI rate, which some commentators have described as a new minimum tax rate.

“There is an incentive to profit-shift,” said Daniel Shaviro, a Professor of tax law at New York University.

https://www.reuters.com/article/us-usa-tax-abbvie/how-u-s-tax-reform-rewards-companies-that-shift-profit-to-tax-havens-idUSKBN1JE12Q

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