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CAPITOL PERSPECTIVES column 12 LIFESCIENCELEADER.COM JUNE 2014 By J. McManus DYSFUNCTIONAL TAX POLICY HARMING LIFE SCIENCE INNOVATION AND JOBS deliberative body in the world, and this job and R&D; killer could be terminated on the installment plan. ANTIQUATED TAX CODE INCENTS FOREIGN OWNERSHIP OF U.S. COMPANIES Meanwhile, Congressional paralysis on comprehensive tax reform has left U.S. corporate tax rates among the highest in the world and continues to distort decision-making of many American pharmaceutical executives by making it irrational to maintain their primary base of operation in the U.S. The lat- est example is New York-based Pfizer's proposed merger with the smaller U.K.- based Astra Zeneca, in part, to benefit from Britain's lower tax rate. The deal is known as an "inversion," whereby the multinational U.S.-based company becomes an expatriate by acquiring the smaller foreign company. The U.S. tax code encourages this behav- ior because U.S.-based companies are taxed at the 35 percent rate for world- wide income, but they can defer U.S. tax on income earned abroad until it is repatriated. Most other countries have a territorial system, which only taxes income where it is earned. JOHN MCMANUS is president and founder of The McManus Group, a consulting firm spe- cializing in strategic policy and political counsel and advocacy for healthcare clients with issues before Congress and the administration. Prior to founding his firm, McManus served Chairman Bill Thomas as the staff director of the Ways and Means Health Subcommittee, where he led the policy development, negotiations, and drafting of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. Before working for Chairman Thomas, McManus worked for Eli Lilly & Company as a senior associate and for the Maryland House of Delegates as a research analyst. He earned his Master of Public Policy from Duke University and Bachelor of Arts from Washington and Lee University. An inversion enables the company to pay only U.S. taxes on its U.S. income, and not its worldwide income. In Pfizer's case, it had $69 billion in foreign profits indefinitely invested abroad because it did not want to subject those earnings to the high U.S. tax rate. Pfizer CEO Ian Read proudly stated that the deal would "liberate the balance sheet and tax of the combined companies." Valeant's acquisition of Biovail, a Canadian company, enabled it to achieve a low single-digit tax rate. It is now attempting a hostile takeover of California-based Allergan and touting the tax savings that can be achieved to maximize shareholder value and slash Allergan's current 25 percent rate. Allergan is a profitable company that has been growing by double digits for years and devotes about 15 percent of rev- enue to R&D.; Valeant lost money on $500 million less revenue than Allergan last year and devotes only about 3 percent to R&D;, preferring to acquire already- successful products. Yet the distorted tax code makes the acquisition of Allergan a distinct possibility. Of course these mergers do much more than erode the U.S. tax base. They often result in substantial job loss, particu- larly in the U.S., and reduced R&D; for the cures of tomorrow. These "efficiencies" have been publicly discussed as a benefit to shareholder value, even though there may be less value to the society at large over the long run. What happens to these high-wage, high-skilled jobs that beget other good jobs? Who is going to support the economy and provide the tax base for investments in our future? Is America going to cede these jobs to Europe, Latin America, and East Asia? WHAT IS CONGRESS DOING ABOUT INVERSIONS? Ways and Means Chairman Camp (R-MI) introduced comprehensive tax reform legislation that would lower the U.S. cor- porate tax rate to 25 percent and move to a territorial system that eliminates incentives for inversions. On May 8, 2014, Finance Chairman Senator Ron Wyden (D-OR) issued a pub- lic statement saying that he and Senator Carl Levin (D-MI) intend to introduce legislation to stymie the growing trend of U.S. companies inverting and moving their tax domiciles outside of the U.S. His bill would have a retroactive effec- tive date of May 8, 2014. In addition, the bill increases the current 20 percent threshold of foreign company ownership to invert to 50 percent. While that bill is more punitive than the Camp approach, it does not address the underlying inter- national inequities that are distorting company decision-making. Unfortunately, with comprehensive tax reform stalled, the prospect of any action in this area looks remote. CONCLUSION Current U.S. tax policy, including the medical device excise tax and the dys- functional corporate tax, has harmed U.S. innovation and U.S. job creation in the life sciences industry. It is high time that Congress begins solving these prob- lems, even if it's through a piecemeal approach like a temporary suspension of the device tax. l It is now undeniable that federal tax policy has as big an impact on innovation in healthcare as any other healthcare policy that impacts Medicare, Medicaid, or commercial insurance coverage and reimbursement. 0 6 1 4 _ C P . i n d d 2 0614_CP.indd 2 5 / 2 1 / 2 0 1 4 1 1 : 5 0 : 5 5 A M 5/21/2014 11:50:55 AM