U.S. drug makers see big profits — but many pay taxes far below the corporate rate

AILSA CHANG, HOST:

With Tax Day approaching, Americans are scrambling to file their last-minute returns. Now, taxes for corporations can be more complicated. And when it comes to calculating them, many of the largest pharmaceuticals companies report losing money in the U.S. despite the majority of their sales happening here. NPR pharmaceuticals correspondent Sydney Lupkin joins us now to talk about how the companies often pay so little in taxes here. Hey, Sydney.

SYDNEY LUPKIN, BYLINE: Hi.

CHANG: Hi, so what do these companies wind up paying, then?

LUPKIN: Yeah. In recent years, the biggest pharmaceutical companies had an effective tax rate ranging from around 8- to 14% according to analysis by the Senate Finance Committee. Now, that's quite a bit lower than the nominal corporate tax rate of 21% that went into effect during the Trump administration. So why is this happening? I asked economist Brad Setser, who spent some time looking at this and is now at the Council on Foreign Relations. He started with Pfizer's experience.

BRAD SETSER: In a typical year, Pfizer reports losing money in the United States and making money abroad. And as a result, in a typical year, Pfizer pays a lot more in tax outside the United States than it pays inside the states.

LUPKIN: And sure enough, when I looked at the financial records for the top five drug companies in the United States to see what was happening, all but one reported losing money in the U.S. last year.

CHANG: What? How does that happen, though?

LUPKIN: So that's a good question because drug companies make most of their sales in the United States.

CHANG: Right.

LUPKIN: And that's in large part thanks to our unique health care system and the higher prices Americans pay for drugs. The top five American pharmaceutical companies all had more drug sales in the United States than they did in all the other countries put together. That's according to Evaluate Pharma, which tracks these figures. So back to your question of how that translates to losses, I asked Setser to help explain it, and here's what he said.

SETSER: How do they do it? You license your intellectual property to an offshore subsidiary. You produce the high-value-added active ingredients in a factory in Ireland or Singapore. And you pretend like the profit is accrued to these offshore subsidiaries even though the sales are back to the United States.

LUPKIN: And to be clear, this is legal. Though, to be sure, tax law is complicated. There are other nuances baked into a company's effective tax rate acquisitions where the company being acquired had a lot of debt, litigation, things like that. But generally speaking, investors and companies want them to get a good deal on their taxes and hang on to as much cash as possible.

CHANG: I mean, I guess so, but are there any drug companies that stand out in the latest tax year?

LUPKIN: So Pfizer is an interesting one. It actually has a negative effective tax rate for 2023, and that's in part because of restructuring charges and tax losses that are unique to the company. But make no mistake - it reported almost 60 billion in revenue in 2023. So yes, that's less than it was at the height of the pandemic, when governments around the world were making these big bulk purchases of Pfizer's COVID vaccine. But the revenues are still higher than they were pre-pandemic, and that vaccine is still among the top 10 bestselling drugs in the world. So that said, Pfizer won't pay any taxes in the U.S. for 2023 but will pay some foreign taxes. When I asked Pfizer about this, the company said it abides by the law and pays all taxes due.

CHANG: So do you think any of this could change in the future?

LUPKIN: You know, it seems pretty unlikely. I spoke again with Brad Setser, that economist who's a former Biden administration adviser. He says they tried to do it but weren't successful. There is some legislation that has been introduced this week, so we'll see if that goes anywhere.

CHANG: That is NPR's Sydney Lupkin. Thank you, Sydney.

LUPKIN: You bet. Transcript provided by NPR, Copyright NPR.