Montana Governor Unveils Legislation Aimed at Collecting Taxes Owed to the State from Pharmaceutical Companies

(HELENA) – Governor Brian Schweitzer today unveiled information about legislation he intends to bring to the next legislative session that can help the State of Montana fairly tax the profits earned by drug companies in Montana. The legislation is being drafted by the Department of Revenue for the purpose of requiring the companies to fully report their income earned in Montana and pay the taxes on that income.

Pharmaceutical companies have in recent decades avoided billions of dollars in federal and state income taxes by shifting income earned in the United States to overseas locations through complex tax sheltering methods.

“By avoiding paying their fair share of taxes, these giant pharmaceutical companies are cheating Montanans,” said Governor Brian Schweitzer. “It is time these drug companies pay what they owe to the citizens of Montana.”

The Irish Times reported on August 16, 2008 that several Irish subsidiaries owned by U.S. multinationals have become “unlimited”, protecting the financial performance of their Irish operations from public view. The report when on to say, the conversions to unlimited status have occurred over the last three years as the U.S. tax authorities have increased their scrutiny of international mechanisms used by American multinationals to reduce their taxes at home. (Source: Simon Carswell, “Janssen move keeps financial affairs private,” Irish Times, August 16, 2008, http://www.irishtimes.com/newspaper/finance/2008/0816/1218748038117.html)

When corporations were given a tax amnesty in the Bush Administration to return tax sheltered income to the United States—on the grounds that the amnesty would create U.S. jobs—the drug industry actually cut tens of thousands of jobs in the U.S.

After the amnesty expired, the drug industry returned to using complex strategies to shelter profits earned in the United States overseas.

• Eli Lilly reported profits in 2006 of $3.4 billion, but paid less than 6% in federal taxes—when the statutory federal rate is 35%. By avoiding federal taxes, Eli Lilly also avoided state taxes on their profits in states where it files returns.

• Merck paid a $2.3 billion settlement to the IRS regarding its use of a Bermuda-based subsidiary to which it transferred patents and then paid that subsidiary tax deductible royalties for those patents. GlaxoSmithKline paid the IRS $3.4 billion in a settlement of a similar case in 2006.

• Amgen, a large biotechnology firm, reduced its federal and state income taxes by claiming nearly a 100% profit margin on its foreign sales, but only a 15% profit margin on its U.S. sales.

(Source for above: Alex Berenson, “Tax Break Used by Drug Makers Failed to Add Jobs,” NY Times, July 24, 2007, http://www.nytimes.com/2007/07/24/business/24drugtax.html?_r=1&scp=1&sq=Tax%20Break%20Used%20by%20Drug%20Makers%20Failed%20to%20Add%20Jobs&st=cse)

Tax schemes used by drug companies often involve declaring profits in foreign markets at much higher rates than their American markets even though drug prices are typically higher in the U.S. than in other countries. Drugs manufactured by subsidiaries abroad are sold to the U.S. parents at inflated prices to overstate profits overseas and understate profits here. Other schemes used by these companies involve pumping up federal and state tax deductions by essentially paying themselves, through overseas subsidiaries, interest on loans of funds accumulated or transferred overseas or royalty payments for patents transferred abroad.

Sarah Elliott 406-444-9725
Jayson O’Neill 406-444-9844
selliott@mt.gov

Posted: September 2010


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