(Bloomberg) Gilead Sciences Inc.’s profit margin has soared and its tax rate has plummeted since the drugmaker introduced its controversial $1,000-a-day medication for hepatitis C, according to a report by an advocacy group that accuses the company of using accounting gimmicks to stash billions in earnings in tax havens offshore.

By moving some of its intellectual property to Ireland, Gilead was able to employ a common strategy that cut its U.S. tax bill by $10 billion since 2013, according to Americans for Tax Fairness, a left-leaning think tank. Two-thirds of Gilead’s sales of the breakthrough hepatitis C drug Sovaldi are in the U.S., but the Foster City, California-based company books only about 37 percent of its profits domestically and assigns the rest to places with lower or no taxes, according to ATF’s report. Gilead’s avoidance of U.S. federal taxes was particularly galling, the report says, because federal research grants helped lead to Sovaldi’s development.

Tax strategies highlighted by ATF, which are widely used by pharmaceutical and technology companies, have become a major political issue. The Obama administration has taken several steps to try to urge U.S. multinationals to bring back the $2 trillion in earnings they hold offshore to avoid taxation. But many corporations say the U.S. tax rate is so high it would render them noncompetitive, making offshore maneuvering a matter of survival.

Legal ‘Loopholes’
“It’s a stunning example of what’s wrong with the U.S. tax system,” said Frank Clemente, executive director of ATF.

Gilead used profit-shifting and other legal “loopholes” in the U.S. tax code to hold earnings overseas and sidestep U.S. taxes, ATF said. The company’s profit margin has increased five-fold since 2013 and reached $21.7 billion last year, according to Gilead’s public filings. (Sovaldi was approved in December 2013.) During the same period, Gilead’s effective worldwide tax rate fell from 27.3 percent to 16.4 percent. While the statutory U.S. corporate tax rate is 35 percent, most companies pay far less than that and Gilead does not disclose its effective U.S. tax rate.

Gilead spokeswoman Michele Rest declined to comment on the report.

Gilead charges more for Sovaldi in the U.S. than in many other markets and U.S. taxpayers have paid the company more than $5 billion a year to treat thousands of hepatitis C patients through Medicare and Medicaid, the group reported.

NIH Funding
“This is a gross injustice—we Americans continue to pay the highest pharmaceutical prices at the same time these companies refuse to pay their fair share for our country’s security,” said U.S. Representative Lloyd Doggett, a Democrat from Texas, who participated in a conference call announcing the report’s release. Doggett is a senior member of the House’s tax-writing committee and chair of the House Prescription Drug Pricing Caucus.

Discoveries at the heart of many drugs are made by federally funded researchers. In the case of Sovaldi, money for some of the research came from the National Institutes of Health and the Department of Veterans Affairs, which spends tens of billions of dollars annually on grants and other financial help for promising medical research.

While Sovaldi has been heralded as a medical breakthrough for patients afflicted with potentially deadly hepatitis C, its aggressive pricing caused an uproar. When it was introduced in 2013, the 12-week course of the medication had a list price of $84,000 before discounts and rebates that are negotiated with insurers.

Pricing Criticized
A combination treatment known as Harvoni, which pairs Sovaldi with another drug, debuted a year later at $1,125 per pill, or $94,500 for a full treatment. Various research groups have estimated that the production cost of a full treatment ranges from $68 to $1,400, according to the report.

The Senate Finance Committee investigated Sovaldi’s pricing last year and was harshly critical of Gilead. The company’s pricing decision was so focused on maximizing profits that “accessibility and affordability were pretty much an afterthought,” Senator Ron Wyden, an Oregon Democrat, said in releasing the Senate committee’s report.

Gilead now holds $28 billion in earnings offshore and has paid 1 percent in foreign taxes on its cash horde, according to company filings.

Repatriation Holiday
For years, a coalition of U.S. multinationals has pushed Congress and the White House for a “repatriation holiday” that would allow them to bring the money back home at a reduced rate and potentially hire and invest in the U.S. But in 2005, when Congress and the Bush administration temporarily lowered the tax rate on repatriated corporate profits to 5.25 percent from 35 percent, it led to little hiring or investment. 

More than 800 companies availed themselves of the 2005 program, bringing home $300 billion. But 92 percent of that money was used for share buybacks and executive bonuses, according to a subsequent study by the National Bureau of Economic Research. Some of the companies that reaped the biggest tax savings from the 2005 repatriation actually closed plants and laid off tens of thousands of workers in the U.S.

The Obama administration last year proposed a one-time 14 percent tax on existing overseas earnings, coupled with a 19 percent minimum tax on future corporate profits. The measure died in Congress. Bringing home overseas profits has become an issue in the presidential campaign and both Hillary Clinton and Donald Trump have vowed to enact tax code changes that would discourage profit shifting and offshoring profits.

—With assistance from Rebecca Spalding and Caroline Chen

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