(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 last 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 and 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 earlier.
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 points.
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 said.
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 Michigan.
“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.”
—With assistance from Caroline Chen in San Francisco.
