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President Donald Trump’s signature tax overhaul nearly five years ago allegedly opened the door for the pharmaceutical giant AbbVie to shield much of its U.S. sales from federal taxes, according to Senate Democratic investigators, who said their new findings reflect a “clear need to reform” the system.
The report Thursday from the Senate Finance Committee comes as Democrats continue to wrangle over a broader rethink of the laws governing the taxes companies pay on income generated in the United States and abroad. Party lawmakers and top Biden administration officials hope to overhaul the tax code as part of their long-stalled package of economic initiatives, but they have failed to sell their global proposals to Sen. Joe Manchin III (D-W.Va.), a centrist holdout.
“It’s critical that Congress takes steps to fix this broken system, so nurses and firefighters aren’t paying higher tax rates than Big Pharma,” Sen. Ron Wyden (D-Ore.), the chairman of the panel, said in a statement.
Spokespeople for AbbVie did not immediately respond to a request for comment.
In investigating AbbVie, the maker of the popular arthritis drug Humira, the Democrats on the Senate’s top tax-focused committee found that the drug company in 2020 generated 75 percent of its sales in the United States — but only reported 1 percent of that income for U.S. tax purposes. According to the report, AbbVie was able to shrink its tax burden as a result of Trump’s 2017 law, which changed how companies calculate their tax bills on profits generated internationally.
Essentially, the law set up a minimum 10.5 percent tax on income derived from patents, trademarks and other assets abroad. The move was meant to ensure that other changes to the tax code did not spark a wave of offshoring, with companies shifting their operations from the U.S. to low-tax havens overseas.
But Democrats long have contended that many multinational corporations quickly found novel ways to exploit that system anyway. Some of the world’s most profitable firms spread out their assets in ways that allowed them to pay far less than they should have.
AbbVie benefited because it had based its patents, trademarks and other assets for the sale of Humira with subsidiaries in Bermuda, while manufacturing key parts of the drug via a branch in Puerto Rico, the Senate Democrats’ investigation found. These and other tactics helped AbbVie sharply reduce the taxes it owed, lowering its effective U.S. rate in 2018 to about 8.7 percent from 19 percent a year earlier, the data show. For 2021, AbbVie expected to pay an estimated effective tax rate of about 12.5 percent, it said earlier this year.
The report also cites AbbVie’s chief executive, Richard A. Gonzalez, who told investors in 2018 that the GOP tax law would lower the company’s effective rate to closer to 9 percent — far less than the 21 percent corporate rate enacted in 2017.
In issuing the findings, top Senate Democrats sought to lay the groundwork for an even deeper investigation targeting the pharmaceutical industry and its sky-high profits. Wyden has demanded similar documents from two other drugmakers, Merck and Abbott. His panel’s report faulted both companies for having “refused to substantively cooperate.”
Earlier this year, Wyden also took aim at Abbott over its role in the national baby formula shortage. The closure of one of its key plants left Wyden concerned that the firm’s tax practices and stock buybacks — meant to maximize profits and investment returns to shareholders — had come at the expense of infant safety. Abbott denied that, stressing in a statement at the time that it is a “responsible and transparent taxpayer” while adding that stock buybacks “are not impacting our ability to invest in or reopen.”
In the meantime, Democrats have pursued significant changes to the ways that pharmaceutical giants price their drugs and pay taxes.
To lower costs for seniors, party lawmakers proposed granting the government new powers to negotiate some drug prices on behalf of Medicare beneficiaries. On Wednesday, Democrats took the next procedural step to advance the plan, the details of which were first reported by The Washington Post last week. Party lawmakers hope to adopt it as part of a larger spending package in the Senate using a process known as budget reconciliation. The tactic will allow Democrats to bypass a Republican filibuster even in the narrowly divided Senate.
Manchin has supported efforts to lower drug prices. But he has yet to reach agreement with others in his party on the rest of the package, a successor to the ill-fated Build Back Better Act, which passed the House but foundered in the Senate last year. The West Virginia moderate opposed Democrats’ prior bill, a sprawling $2 trillion measure, arguing it could add to the deficit and worsen inflation. GOP lawmakers, in contrast, long have opposed empowering Medicare to negotiate costs.
The Biden administration has forged ahead in trying to strike an agreement on a global minimum tax that would discourage companies from taking advantage of low-tax havens. Its fate rests in part on the Senate, which would have to change existing laws to bring the country in line with the rest of the world.
But that proposal also faltered last year, another casualty of Manchin’s resistance to adopting the Build Back Better Act. Republicans, meanwhile, sought to protect their 2017 tax law at all costs, arguing the sum total of changes rejuvenated the U.S. economy.
In recent weeks, Manchin privately has expressed resistance to the Biden administration’s approach, according to two people familiar with the matter, who spoke on the condition of anonymity to discuss the delicate talks. While the moderate has discussed alternatives with Senate Majority Leader Charles E. Schumer (D-N.Y.), the two people familiar with the deliberations raised fears that the international tax provisions could fall out of the package entirely.
Aides to Wyden, who helped draft the plan, stressed in their report Thursday that their findings with AbbVie illustrated the consequences of inaction. “It is imperative that Congress enact needed international tax reforms that would close loopholes that allow drug companies like AbbVie to stash their profits in tax havens,” they wrote.