This Is How Trump's Corporate Tax Cut Is Backfiring Or The Jobs Stay Overseas With The Money

The corporate tax cut passed by President Trump and fellow Republicans that was in part designed to help dissuade US companies from moving profits overseas may instead make the practice a lot more rewarding.

That is because companies that shifted profits linked to US sales, research or production previously had to pay taxes on the money at the rate of 35 percent when they brought those profits home.

The new tax bill cuts the overall corporate tax rate to 21 percent and allows income from overseas to be taxed at about half that rate — to as low as 10 percent.

Pharma giant AbbVie is a case in point.

Its chief executive, Richard Gonzalez, told investors earlier this year that because of the change to a territorial system, whereby only profits reported by domestic subsidiaries face an IRS bill, the US drugmaker expects its tax rate to fall to 9 percent this year from around 22 percent in recent years.

That ranks among the lowest of the companies in the S&P 500 that have announced estimates for their tax rate, which average around 22 percent, according to Credit Suisse.

The company has historically reported its income in lower-tax jurisdictions, which is possible in part because AbbVie parks the majority of the patents for its top-selling drug in Bermuda — a country that has a zero tax rate on corporate profits, according to a Reuters analysis of 88 Humira patents.

Despite recording over half its $28.2 billion in 2017 sales in the US and basing most of its research facilities there, the suburban Chicago company has never reported a profit in its home country, its annual reports show.

In 2017, AbbVie reported foreign earnings before income tax of $10.4 billion on international revenue of only $9.97 billion.

Yet between 2013 and 2016, AbbVie had to pay around $1 billion a year of taxes to Uncle Sam, when it took the profits reported by foreign subsidiaries home to help cover expenses from its US operations.

In the future, it will not have to pay such taxes under the Tax Cuts and Jobs Act. The authors of the tax legislation, including Sen. John Thune (R-SD), who sits on the Finance Committee, said their bill would discourage the shifting of profits earned in the US.

But the principal anti-tax avoidance measures introduced still allow companies to benefit strongly from profit shifting.

AbbVie does not address the patent locations on earnings conference calls or in its SEC filings, and declined to discuss its accounting practices or its annual US losses — which are widely accepted among investors who have scooped up its shares over the five-year life of the company.

The main driver for AbbVie, a rheumatoid arthritis treatment called Humira, generated more than $12 billion in sales in 2017 from patients in the US, where the most common dose has a list price of about $60,000 a year.

“If the guardrails in the new territorial system were meant to prevent companies from avoiding all taxes, AbbVie’s (tax rate) is a pretty clear signal that these guardrails may not be effective,” said Matthew Gardner, senior fellow with the Institute of Taxation and Economic Policy.

AbbVie is not the only US company with big operations at home but which reports relatively few profits. Pfizer, Expedia, Boston Scientific, Synopsys and Microsoft also do the same and are set to be big winners from the shift in territorial system, executives have said and earnings for the most recent quarter show.

- Reuters