Thanks to a pair of pricey hepatitis C treatments, Gilead Sciences (GILD) has become one of the world’s largest drug makers. Since 2013, revenues have tripled to more than $32 billion and profits grew sixfold, exceeding $18 billion. But beyond successful marketing of lifesaving medicines, the company has excelled in another way — using loopholes to avoid paying billions of dollars in taxes.
By transferring certain key assets to Ireland, Gilead was able to take advantage of tax laws that allowed some US sales to be shifted overseas and yield a significantly lower tax rate. Those overseas profits, meanwhile, mushroomed to $28.5 billion, and Gilead was able to escape paying $9.7 billion in US taxes last year, according to a new report published on Wednesday by the Americans for Tax Fairness, an advocacy organization.
Adding insult to injury, the group pointed out that not only did the high cost of the hepatitis C medicines strain government health care programs, but the drugs were developed, in part, with US taxpayer dollars. The organization, which has chastised Pfizer (PFE) for similar maneuvers, argues that Congress ought to close the loophole to prevent similar tax dodges and provide taxpayers with a better return.
Indeed, the report comes amid ongoing debate about US corporations that exploit loopholes to avoid paying taxes. Pharmaceutical companies, in particular, have been singled out for attempting to acquire rivals based overseas to enjoy lower tax rates. The US Treasury Department recently issued new rules to thwart such deals, known as tax inversions, prompting Pfizer to scuttle a plan to acquire Allergan (AGN).
The latest critique also arrives as Gilead undergoes sustained criticism over its pricing practices.
In 2013, the company launched Sovaldi, its first hepatitis C treatment. The drug boasts a very high cure rate and, therefore, the potential to greatly reduce health care costs that would otherwise skyrocket. But the $84,000 list price for the 12-week regimen — and the $94,500 list price for a follow-up version called Harvoni — alarmed private and public payers, some of which restricted coverage.
Those prices prompted a US Senate Finance Committee investigation, which found the company placed profits before patients. They also played a “significant” part in a 12.2 percent rise in US drug spending in 2014, according to a study in Health Affairs. And a recent study by the World Health Organization concluded that the Gilead drugs remain out of reach for people in many poor countries.
Meanwhile, a curious thing happened on the way to filing its taxes. Gilead reported that the US share of its revenues reached 65 percent, but the US share of its pretax profits dropped to 37 percent. Looked at another way, ATF explained that the drug maker was making only about one-third of its profits in the United States — where sales of its hepatitis C treatments were exploding.
ATF maintained Gilead shifted the profits overseas to avoid taxes and pointed to a few signs to support its analysis. One, in particular, involved transferring economic rights to a key US patent for Sovaldi to an Irish subsidiary. This would have allowed Gilead to create a licensing arrangement that enabled the drug maker to report lower US profits and pay fewer taxes.
Three years ago, in fact, a Gilead executive told analysts the patent had been domiciled in Ireland, which would allow the US corporate tax rate to “decline over time.” As ATF noted, Gilead’s worldwide effective tax rate has since plummeted by 40 percent — falling to 16.4 percent last year from 27.3 percent in 2013.
“Gilead excels at tax dodging and price gouging,” said congressman Lloyd Doggett, a Texas Democrat, in a statement. “While a chief exporter of drug patents and profits to Ireland, it refuses to charge Americans the much lower drug prices of Ireland. Instead of innovation, it has spent more on stock buybacks for executives and shareholders than on research and development. Gilead’s formula for success: prices up, profits up, tax avoidance up. We don’t need research to know this about drug effectiveness: an unaffordable drug is always 100 percent ineffective.”
A Gilead spokeswoman declined to comment.
ATF also cited a larger problem — the US tax code. The organization notes the US will tax worldwide profits of American companies, but taxes on profits kept offshore are not paid until the money is repatriated as dividends distributed to the parent company. This is why Gilead says its offshore profits are “permanently and indefinitely reinvested.”
For this reason, one tax expert believes that while the ATF report may correctly highlight Gilead’s tax gambits, the company is not really the issue at hand.
“I wouldn’t expect much to come from this report, which, while doing so eloquently, simply rehashes problems with the tax law and the accounting rules that have been previously identified,” said Robert Willens, an independent tax adviser who tracks corporate tax maneuvers.
“The real culprit here is the US tax system, which encourages this sort of activity, and the US accounting rules, which allow a company in this position to avoid the accrual of deferred taxes,” he said. “The company seems to be using these rules to its advantage, which is hardly blameworthy, at least to me.”