Patent Baristas

The New York Times had a great overview of the new tax boondoggle that is allowing the biggest drug makers to return as much as $75 billion in profits from international havens to the United States while paying a fraction of the normal tax rate.

The break is part of the American Jobs Creation Act, signed into law by President Bush in October, which allows companies a one-year window to return foreign profits to the United States at a 5.25 percent tax rate, compared with the standard 35 percent rate. See an overview here. Although any company with profits in other countries can take advantage of the law, drug makers have been the biggest beneficiaries because they can move profits overseas relatively easily. Not everyone thinks it’s a great idea.

As detailed, the money comes from years of using tax loopholes to shelter profits from United States taxes. Basically, drug companies claim that their profits come mainly from international sales, even though the prices of medicines are far higher in the United States and almost 60 percent of their sales take place in America. You do the math.

For example, Pfizer said that in 2004 it had only $4.4 billion in pretax profits in the United States, compared with $9.6 billion internationally, though most of its sales came in the United States. The company says that its profit margins on international sales were almost three times as high as on American sales. Let’s see … a three-month supply of 40-milligram tablets Lipitor costs $305 at Walgreens.com and an internet pharmacy in Canada lists it for $174. Hmmmm. Appartenly, they went to the same bookkeeping lesson as my brother.

Apparently, the I.R.S. lacks the resources to challenge the companies so drug companies collectively pay a federal tax rate of less than 15 percent on worldwide profits. Although the act is intended to create jobs, Pfizer announced it would cut its annual costs by $4 billion over the next three years (read: get rid of workers) while it repatriates at least $28 billion under the act.

And the nifty part is that after the break expires, companies will probably go back to stockpiling profits overseas as they wait for another tax holiday in a few years. Congress has already shown it’s willing to kow-tow to these companies.

MSNBC reported that the tax savings could run about $39 billion from the legislation. Money that won’t go to social security, roads, etc. I guess making the tax rates reasonable for everyone was out of the question.

Oh, by the way, the government proposes to pay for the tax breaks, estimated at $143 billion over 10 years, mainly by closing tax loopholes and cracking down on tax cheats. That’s you, my friend.

Fortunately, SUVs still get a break. The new tax bill reduces but doesn’t eliminate the tax break for SUVs. Autos generally do not qualify with one exception: Vehicles that weigh more than 6,000 pounds — which include most trucks, vans and SUVs. Great. Burn more fossil fuels and get a tax break.

And what’s with the name? How does a 650-page bill that bestows billions in corporate tax breaks get titled the American Jobs Creation Act? Nice title for something that contains little that requires or even encourages companies to hire workers. Sen. John McCain, R-Ariz., who did not vote on the bill, called it the “worst example of the influence of the special interests I have ever seen.” That would have been a better title for the bill.

The Patent Baristas need to lobby harder to get included in the next tax bill that comes around.