President Donald Trump and fellow Republicans passed a corporate tax cut designed, in part, to help dissuade companies in the United States from moving profits overseas.

Companies that had previously shifted profits linked to U.S. sales, research, or production had to pay taxes at the rate of 35 percent when they brought those profits home.

The new tax bill cuts the corporate tax rate by 21 percent and allows income from overseas to be taxed at half the rate – as low as 10 percent.
Chief executive of AbbVie Inc. Richard Gonzalez told investors, early in 2018, that due to the change to a territorial system, only profits reported by domestic subsidiaries face U.S. taxes. The drug manufacturer believes its tax rate will fall to nine percent this year from the 22 percent the company was paying.

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

AbbVie Inc. recorded over half its sales in 2017, in the U.S. and based most of its research facilities in Bermuda. The Chicago-based company has never reported a profit in the U.S., according to annual reports.

The company reported foreign earnings, before income tax, of $10.4 billion on an international revenue of $9.97 billion. However, between 2013 and 2016, the company had to pay $1 billion a year in taxes to the U.S. The company took profits reported by foreign subsidiaries home to cover expenses from U.S. operations.

Moving forward, AbbVie Inc. will not have to pay these taxes under the Tax Cuts and Jobs Act. The authors of the tax legislation said their bill will discourage the shifting of profits earned in the U.S. However, the principal anti-tax avoidance measures still allow companies to benefit from profit shifting.

AbbVie Inc. is not addressing patent locations on its earnings conference calls or in SEC filings. The company has also declined to discuss accounting practices or yearly losses in the U.S. This action is widely accepted among investors who have purchased shares over the past 5 years of the life of the company.

The primary driver for the company is Humira, a treatment for rheumatoid arthritis. The drug generated over $12 billion from patients in the U.S. since 2017. The most common dosage costs $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 the guardrails may not be effective,” according to senior fellow with the Institute of Taxation and Economic Policy, Matthew Gardner.

There are other companies with large operations in the U.S. that report relatively few profits: Boston Scientific Corp., Pfizer Inc., Microsoft Corp., Boston Scientific Corp., Expedia Group Inc., and Synopsys Inc. They all operate the same as AbbVie Inc. and are set to become big benefactors of the shift in territorial system, according to executives and earning for the most recent quarter.

By Jeanette Smith


Reuters: How U.S. tax reform rewards companies that shift profit to tax havens

Image Courtesy of geralt’s Flickr Page – Creative Commons License