[Ip-health] Bloomberg: Gilead Avoids Billions in U.S. Tax on Its $1, 000-a-Pill Drug

Jamie Love james.love at keionline.org
Tue Mar 3 05:54:39 PST 2015


Gilead Avoids Billions in U.S. Tax on Its $1,000-a-Pill Drug
by Richard Rubin
February 26, 2015

(Bloomberg) -- Gilead Sciences Inc., whose $1,000-a-pill hepatitis C
treatment is one of the world’s most expensive drugs, is avoiding billions
of dollars in U.S. taxes by booking profits overseas.

The company reported foreign income before taxes of $8.2 billion for 2014,
earning more in non-U.S. profits than it recorded in non-U.S. sales. The
data released in a securities filing Wednesday suggest that Gilead is
shifting valuable intellectual property to low-tax countries and paying
about 5 percent in taxes on its foreign income, said Robert Willens, an
independent tax consultant based in New York.

“Whenever you have huge, very high profit margins and a lot of income as
well, it almost always results from the exploitation of intangibles,”
Willens said in a telephone interview. “It’s quite a dramatic increase from
one year to the other. That’s something you don’t see very often.”

Gilead’s disclosure is the latest example of tax planning by U.S.-based
multinational corporations, which hold about $2 trillion in stockpiled
profits outside the country that haven’t been taxed by the U.S. The federal
government loses as much as $100 billion in revenue annually because of
such international tax planning, according to estimates cited in a
Congressional Research Service study.

Pfizer, Merck

Other U.S. drugmakers have kept profits offshore as well. Pfizer Inc.,
Merck & Co. Inc. and Bristol-Myers Squibb Co. each has at least $24 billion
outside the U.S., according to filings.

Cara Miller, a spokeswoman for Gilead, declined to comment beyond the
information in the filing.

The intellectual property for the drug is in Ireland, Robin Washington, the
company’s chief financial officer, told analysts on a February 2013 call.

“As we commercialize that, there is opportunity for our tax rate to decline
over time,” she said.

That’s exactly what happened.

Gilead received approval in December 2013 from the U.S. Food and Drug
Administration for Sovaldi, its blockbuster drug for hepatitis C, and the
drug sold $10.3 billion last year.

Sovaldi, and a related pill called Harvoni that combines Sovaldi with
another drug, offers patients a convenient therapy that has transformed the
way the liver infection is treated, with most patients being cured after a
12-week course.

Competing Treatment

The Foster City, California, company has drawn criticism for the drugs’
costs. A 12-week course of Harvoni goes for $94,500, though a competing
treatment introduced late last year by AbbVie Inc. has put pressure on
Gilead to offer discounts to some health insurers and drug-benefit managers.

Gilead also has offered discounts to the U.S. Department of Veterans
Affairs and Medicaid, the government health program for the poor.

Even with discounts, the drugs have been a boon to Gilead, which reported
global net income of $12.1 billion in 2014, up from $3.1 billion a year

Foreign income before taxes increased even faster, to $8.2 billion from
$738 million in 2013, suggesting that the vast majority of the new revenue
was being recorded outside the U.S.

The company’s U.S. sales rose as a percentage of all revenue, with 73
percent of revenue coming from domestic sales, up from 60 percent,
according to the filing.

Gilead has a “worldwide revenue base and operations in Ireland,” Washington
told analysts in October. Ireland has a top corporate tax rate of 12.5
percent. The comparable U.S. rate is 35 percent, the highest in the
industrialized world.

Reducing Rate

Washington told analysts last year that each $1 billion in Sovaldi sales
would allow the company to reduce its tax rate by 0.75 to 1 percentage

According to its filings, Gilead has paid little foreign tax on the income
it has earned outside the U.S.

Under U.S. law, companies pay the full U.S. corporate tax rate of 35
percent on profits they earn around the world, plus the corporate income
tax, which is 8.84 percent in California. They receive tax credits for
payments to foreign governments and only have to pay the residual tax to
the U.S. if they repatriate profits.

That system creates an incentive for companies to book profits outside the
U.S. and leave
them there.

As of Dec. 31, Gilead held $15.6 billion in offshore profits that haven’t
been taxed by the U.S., up from $8.6 billion a year earlier.

$5.5 Billion

The company said it would have to pay $5.5 billion in U.S. taxes if it
brought home the $15.6 billion. That’s a 35.3 percent rate, suggesting that
Gilead has paid about 5 percent
in foreign taxes on its offshore profits, Willens said.

“That tells you that they’re operating in very, very low-tax countries,” he
Companies in the technology and pharmaceutical industries are particularly
adept at shifting profits out of the U.S. That’s because they generate
income from intangible intellectual property, such as patents, which can be
moved to low-tax countries more easily than factories can.

The transfers of intellectual property are treated as taxable sales from
the U.S. parent company to the foreign subsidiary. The difficulty is
determining the correct price, especially for a drug that hasn’t been
approved at the time of the transfer.

What Gilead has done is “very standard” tax planning for pharmaceutical
companies, said Reuven Avi-Yonah, a tax law professor at the University of

“The issue usually is you don’t want to move it before you know it’s going
to succeed,” he said. “But you also don’t want to wait until the value is
too high.”

To contact the reporter on this story: Richard Rubin in Washington at
rrubin12 at bloomberg.net
To contact the editors responsible for this story: Jodi Schneider at
jschneider50 at bloomberg.net

James Love.  Knowledge Ecology International
KEI DC tel: +1.202.332.2670, US Mobile: +1.202.361.3040, Geneva Mobile:
+41.76.413.6584, twitter.com/jamie_love

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