Time to End Roundtripping by Big Pharma

Sometimes a news story makes your case for you.

That happened this past week, when the Wall Street Journal published a remarkable story on surging U.S. imports of peptides and protein-based hormones from Ireland. Chelsey Dulaney and Jared Hopkins wrote:

“Planes have been jetting from Ireland to the U.S. this year carrying something more valuable than gold: $36 billion worth of hormones for popular obesity and diabetes drugs … The peptide- and protein-based hormones feed into a category of drugs that include wildly popular GLP-1 treatments and newer types of insulin known as analogues. Taken together the shipments weighed just 23,400 pounds, according to U.S. trade data, equivalent to the weight of less than four Tesla Cybertrucks … The shipments have propelled Ireland, a country of only 5.4 million people, to the second-largest goods-trade imbalance with the U.S., trailing only China.”

That’s right—the trade deficit with Ireland is now second only to China. Economists and trade policy specialists really do need to spend a bit more time studying how tax avoidance drives a large part of modern global trade.

The main reason why the U.S. trade deficit soared in the first quarter was that America’s leading pharmaceutical firms raced to build up stockpiles of their most profitable drugs ahead of expected tariffs.

Eli Lilly could, of course, make the ingredients for its weight loss drugs (injections, and forthcoming pill) in the United States. Its Danish rival, Novo Nordisk, actually does a fair amount of its manufacturing in the United States.

But if Lilly produced its drugs in the U.S., it would have trouble shifting the profit on its drugs abroad—and it would, more or less, pay the headline 21 percent tax rate on its U.S. profits. Fair enough; Novo Nordisk pays the Danish tax rate of 22 percent on its profits.

And the 2017 Trump-Ryan corporate tax reform created an easy way for American pharmaceutical companies to avoid paying the headline U.S. tax rate. Conduct a few transactions to move the right to profit from the firms’ intellectual property to an offshore subsidiary in a low-tax jurisdiction, produce those drugs abroad, and import them to the U.S. (the pre-Trump pharmaceutical tariff was zero) and pay the 10.5 percent global intangible low-taxed income (GILTI) rate rather than the 21 percent headline tax rate on profits derived largely from U.S. sales.

This tax break led pharmaceutical companies to produce their most valuable drugs in Ireland first—it is the exact opposite of the kind of policies a true “America First” President would enact.

There are countless examples that show just how powerful this tax incentive has been: Merck and Keytruda. Lilly and Zepbound, Mounjaro, and likely orforglipron. Pfizer and Viagra (way back when), and now Enbrel and Prevena.

After the 2017 Tax Cuts and Jobs Act (TCJA), imports from Ireland soared.

As did imports from other well-known low-tax jurisdictions.

What’s more, America’s top pharmaceutical firms have basically stopped paying corporate income tax in the U.S.

Now, they are still settling their tax liability on their “deferred” offshore profits from before 2016 (those profits were taxed at 15.5 percent as part of the transition to the new Trump/Ryan corporate tax code), a fact that the companies will occasionally highlight (see Pfizer’s response to Senator Wyden’s investigation); Pfizer refused to cooperate with the investigation and did not provide Wyden’s investigative staff with the details of their tax arrangements in Singapore which are likely quite, umm, generous.

But the top six companies collectively did not set aside anything in 2023 to pay their expected 2023 U.S. corporate income tax. And then they did the exact same thing in 2024.

The U.S. is collecting less in corporate income from the top pharmaceutical companies’ taxes now, under the TCJA, than it did under the (widely disliked) old tax system.

I highlighted these points—and hopefully drew attention to the legislation that Senators Wyden, Warner, Warnock and Welch introduced to get rid of the incentive for pharmaceutical companies to pump up the trade deficit through tax games that shift the profit on their U.S. sales abroad, in an op-ed in the New York Times on Friday.*

There is a lot going on these days, but the piece is, I hope, worth reading.

I want to highlight one point that didn’t make the final cut of the Times piece, namely that we more or less know how to get significantly more tax revenue out of major U.S. companies. The top seven pharmaceutical companies are paying $10 billion or so in tax on their $70 billion in offshore profit. They are just paying all that tax abroad.

Apple reported $80 billion ($78.3 billion) in offshore profit in 2024, up from around $70 billion in 2023. Microsoft reported $45 billion in offshore profit in 2024, and $36 billion in 2023.

That is just under $200 billion in offshore profits from fewer than ten companies, and a large share of the $350 billion that the U.S. balance of payments data shows that American firms earned in low tax jurisdictions in 2023.

The tax strategies these companies use are known, as are the changes that would lead the companies to repatriate their intellectual property and start paying tax in the U.S. rather than in Ireland, Singapore, and a few other “business-friendly” jurisdictions.

Letting the most profitable U.S. companies basically avoid paying any U.S. corporate income tax on a big chunk of their earnings is a luxury that the U.S. can no longer afford. Not with seven percent of GDP fiscal deficits as far as the eye can see amid heightened geopolitical tension.

The impact of pharmaceutical roundtripping on the trade balance is both too big to continue and too big to ignore.

Time for some real changes. Alas, such changes aren’t in either the House or the Senate tax legislation.

* President Trump seems intent on fighting a trade war with Europe because of the U.S. trade deficit with Europe, even though that deficit is largely a function of the incentives for U.S. companies to move production and profits to Europe that Trump’s own tax law created. It is absurd. I highly recommend a recent ECB paper that (quietly) points this out. The language is of course technical, but there isn’t any real doubt that the ECB’s stats team and its chief economist understand exactly what is going on.