Wednesday, July 27, 2011

Big Corp Tax Loophole Closer #18: Manufacturing Bouncebacks

A typical Big Pharma Corp does a substantial portion of its Research and Development on new drugs in the US, gets a US federal and US state income tax deduction for these R&D costs, and also a US R&D tax credit, to boot.

Then after drug discovery, it transfers the intellectual property (the drug compound) to a foreign tax haven, like Puerto Rico and Ireland, where the drug is manufactured, and thus the massive amount of profit is recognized in this tax haven.

And then a good chunk of the manufactured drugs are sold to US customers, some of whom even live very close to where the R&D was performed on the drug in the first place.

What a Roundhouse transaction…..a clear Manufacturing Bounceback or Boomerang!

But after this Roundhouse transaction goes full circle, when Uncle Sam and the US States put their hands in their pockets, they find no corporate income tax receipts. In fact, they both gave income tax deductions to the drug company for the R&D costs, and also granted R&D tax credits, but tax havens like Puerto Rico and Ireland are where the massive profits from the drug are located, and income taxed at an incredibly very favorable income tax rate, and particularly so in Puerto Rico.

And now these Drug companies are lobbying the US heavily to be able to repatriate, at a very favorable US tax rate, all of their very low-taxed foreign earnings, which are now parked in their foreign tax havens.

Gosh, I call this just flat out piling on. The US Federal Government and the US States are under severe financial stress and they let these Big Drug companies get away with avoiding so much in corporate income taxes.

Clearly, from a fairness standpoint, something needs to be done here.

My recommendation here is that in a drug Roundhouse transaction, where a Big US drug company does the drug research in the US, and then the resultant drug is manufactured in a foreign tax haven, and then subsequently sold back to the US, I think it is only fair that there should be some kind of a tax or import duty shared by the US government and the US State government on the drug sold to the US customer.

And it’s just not Big Pharma. Many other Big US manufacturers replicate the same Roundhouse transactions.

Thus I think there should be the same kind of a tax or import duty on a Big US Corp on all of its manufactured products, manufactured in a foreign tax haven, or manufactured in a foreign country where there are low wages or substandard clean air standards, and then these products are sold to a US customer.