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July 27,2022

Companies have refused to provide the taxable income reported by offshore subsidiaries

Washington, D.C. –  Senate Finance Committee Chair Ron Wyden, D-Ore., today demanded Merck and Abbott comply with the Senate Finance Committee’s investigation into the tax practices of Big Pharma.

The companies have thus far stonewalled the committee and refused to provide specific information related to where it books profits from U.S. drug sales. This includes refusing to provide specific data on how much taxable income is reported by offshore subsidiaries known as controlled foreign corporations for tax purposes. This data would allow the committee to better understand the discrepancy between U.S. sales and where income is booked. The 2017 Republican tax law has encouraged and rewarded Big Pharma’s shifting of profits offshore, allowing companies like Merck and Abbott to avoid billions of dollars in taxes on U.S. prescription drug sales.

Instead of using these tax savings to make necessary upgrades to baby formula plants critical to feeding our nation’s infants, Abbott has instead chosen to reward investors through stock buybacks. Just in the first six months of this calendar year, Abbott has spent over $2 billion buying back its own stock.

“Unfortunately, Merck has twice declined to provide the Committee this information, choosing to keep secret how much of its profits are reported by offshore subsidiaries for tax purposes. As noted in previous communications on this matter, there appears to be a substantial discrepancy between where Merck generates prescription drug sales and where Merck books profits from those drug sales for tax purposes,” Wyden wrote to Merck.

Wyden continued, “Merck has indicated that all profits from sales of blockbuster cancer drug Keytruda, including sales made to U.S. consumers, are ‘taxed in jurisdictions outside the United States.’ Merck further stated that as Keytruda became an even larger portion of Merck’s overall profits, this ‘increased the portion of Merck’s overall income subject to tax outside the United States.’ Since Merck holds the intellectual property rights to Keytruda in the Netherlands and manufactures the drug entirely in Ireland, Merck is able to avoid billions of dollars in taxes on profits from Keytruda sales in the United States.”

In the letter to Abbott, Wyden wrote, “Unfortunately, Abbott has declined to provide the Committee this information, choosing to keep secret how much of its profits are reported by offshore subsidiaries for tax purposes. As noted in previous communications on this matter, it appears Abbott is the beneficiary of favorable tax treatment in several well-known low tax and tax haven jurisdictions. The company claims that its tax expense was ‘favorably impacted by lower tax rates and tax exemptions on foreign income primarily derived from operations in Puerto Rico, Switzerland, Ireland, the Netherlands, Costa Rica, Singapore, and Malta.’  Additionally, Abbott stated that it “benefits from a combination of favorable statutory tax rules, tax rulings, grants, and exemptions in these tax jurisdictions.”

Wyden continued, “The United States is by far Abbott’s biggest customer market and profit center. In 2021 alone Abbott sold over $16 billion worth of pharmaceutical goods to U.S. customers. That is six times more than its second biggest market, Germany, and seven times more than its third biggest market, China. In fact, in 2021 Abbott sold more pharmaceutical products in the United States than Germany, China, Japan, India, Canada and Switzerland combined. Yet despite all of this, it is unclear how much of Abbott’s income is being reported offshore for tax purposes.” 

Text of the letter to Merck follows:

Mr. Robert M. Davis

Chief Executive Officer and President

Merck & Co., Inc.

2000 Galloping Hill Road

Kenilworth, New Jersey 07033

 

Dear Mr. Davis,

I write regarding Merck & Co., Inc.’s (Merck) refusal to provide the Senate Finance Committee (“the Committee”) information it has requested related to Merck’s tax practices. As you are aware, the Committee is conducting an investigation into how the 2017 Republican tax law helped slash tax rates for large pharmaceutical corporations headquartered in the United States. In particular, the Committee’s investigation seeks to uncover the full extent to which drug companies are able to exploit foreign subsidiaries to avoid paying taxes on U.S. prescription drug sales.

As part of this investigation, I have requested detailed information from Merck to understand the methods by which Merck paid an effective tax rate of just 11% in 2021, approximately half the U.S. corporate tax rate of 21%. Specifically, I requested country-specific information related to Merck’s pre-tax earnings, profit margins, employee headcount and tax paid for tax years 2018 – 2021. This included copies of Merck’s IRS form 8975, an annual country-by-country tax reporting required for large corporations with over $850 million in annual income. I also requested information related to Merck’s taxable income for years 2018 – 2021, including how much of Merck’s taxable income was reported by controlled foreign corporations (CFCs).

Unfortunately, Merck has twice declined to provide the Committee this information, choosing to keep secret how much of its profits are reported by offshore subsidiaries for tax purposes. As noted in previous communications on this matter, there appears to be a substantial discrepancy between where Merck generates prescription drug sales and where Merck books profits from those drug sales for tax purposes.

In 2021, Merck generated more than 46% of its sales in the United States yet reported just 14% of its pretax income in the United States. Although the United States accounted for $22.4 billion of Merck’s sales in 2021, Merck reported only $1.85 billion in pre-tax income in the United States. In contrast, in the same year, Merck reported international pre-tax income of more than $12 billion on approximately $27 billion in international sales. That Merck located more than 85% of its profits in foreign jurisdictions in 2021 implies that the current U.S. international tax system created by the 2017 Republican tax law has encouraged and rewarded Merck’s shifting of profits offshore.

Additionally, Merck has indicated that all profits from sales of blockbuster cancer drug Keytruda, including sales made to U.S. consumers, are “taxed in jurisdictions outside the United States.” Merck further stated that as Keytruda became an even larger portion of Merck’s overall profits, this “increased the portion of Merck’s overall income subject to tax outside the United States.” Since Merck holds the intellectual property rights to Keytruda in the Netherlands and manufactures the drug entirely in Ireland, Merck is able to avoid billions of dollars in taxes on profits from Keytruda sales in the United States.

It is deeply concerning that because of the 2017 Republican tax law’s international provisions, Merck has been able to avoid paying billions of dollars of taxes on profits from record-breaking prescription drug sales to U.S. consumers. Merck charges an annual list price of $175,000 per patient for Keytruda. In the last three years, Merck has sold over $24 billion in Keytruda in the United States alone. Keytruda sales are so lucrative that the drug would be a Fortune 200 company on its own.

This is unfortunately not an isolated case within the pharmaceutical industry. A recent report by the Committee exposed how flaws in the international provisions of the Republican tax law created loopholes that allow drug companies to shift profits offshore for tax purposes. In one case, a major U.S. drug company generated 75% of its sales to U.S. consumers, yet booked 99% of its taxable income in offshore entities located in Bermuda and elsewhere.

Merck was fully dedicated to supporting the 2017 Republican tax law. Lobbying disclosures show Merck spent significant resources supporting the bill, and Merck’s former CEO Kenneth Frazier repeatedly pressed decision-makers on taxes in 2017. Following a January 2017 meeting with President Trump, Mr. Frazier said he and other pharmaceutical executives and lobbyists had focused their discussion on tax policy. Following a February 2017 meeting between President Trump and manufacturing CEOs, Mr. Frazier again said they had discussed changes to the tax code. The February meeting came shortly after Mr. Frazier signed a letter to House and Senate leadership supporting the push for new tax legislation. The letter Mr. Frazier signed was organized by a group—American Made Coalition—that Merck was a member of and that was formed specifically to advocate for changes to tax law. Additionally, in December 2017, after the Senate first passed the tax law, Merck was listed in a Senate Finance Committee press release as supporting the legislation.        

The American public deserves to understand why Merck, a multinational pharmaceutical corporation with annual sales of $48 billion, paid a lower tax rate than a postal service worker or a preschool teacher. This includes providing the American public a full understanding of the extent to which Merck has exploited the Republican tax law to reduce taxes on U.S. drug sales through the use of offshore subsidiaries.

1. For each of tax years 2019 – 2021, please provide a detailed country-by-country breakdown of Merck’s pre-tax earnings, profit margins, employee headcount, and tax paid.

a) Please also provide copies of Merck’s IRS form 8975 for tax years 2019 – 2021.

2. What was Merck’s taxable income each year for the years 2019 – 2021? What was Merck’s taxable income in each year excluding income of controlled foreign corporations?

3. For all Keytruda sales made in the United States in years 2019 – 2021, please provide how much tax was paid in the United States.

4. For all profits attributable to Keytruda-related intellectual property rights from 2019 – 2021, please provide a detailed list of countries where Merck paid taxes. Please also provide the amount of taxes paid in the United States.

Text of the letter to Abbott follows:

Mr. Robert Ford

Chairman and Chief Executive Officer

Abbott Laboratories

100 Abbott Park Road

Abbott Park, Illinois 60064

 

Dear Mr. Ford,

I write regarding Abbott Laboratories’ (Abbott) refusal to provide the Senate Finance Committee (“the Committee”) information it has requested related to Abbott’s tax practices. As you are aware, the Committee is conducting an investigation into how the 2017 Republican tax law helped slash tax rates for large pharmaceutical corporations headquartered in the United States. In particular, the Committee’s investigation seeks to uncover the full extent to which drug companies are able to exploit foreign subsidiaries to avoid paying taxes on U.S. prescription drug sales.

As part of this investigation, I have requested detailed information from Abbott to understand the methods by which Abbott has paid tax rates that are substantially lower than the U.S. corporate tax rate of 21%. Since the passage of the 2017 Republican tax law, Abbott has paid an effective tax rate of 9.6% in 2019, 10% in 2020 and 13.9 in 2021. Specifically, I requested country-specific information related to Abbott’s pre-tax earnings, profit margins, employee headcount and tax paid for tax years 2018 – 2021. This included copies of Abbott’s IRS form 8975, an annual country-by-country tax reporting required for large corporations with over $850 million in annual income. I also requested information related to Abbott’s taxable income for years 2018 – 2021, including how much of Abbott’s taxable income was reported by controlled foreign corporations (CFCs).

Unfortunately, Abbott has declined to provide the Committee this information, choosing to keep secret how much of its profits are reported by offshore subsidiaries for tax purposes. As noted in previous communications on this matter, it appears Abbott is the beneficiary of favorable tax treatment in several well-known low tax and tax haven jurisdictions. The company claims that its tax expense was “favorably impacted by lower tax rates and tax exemptions on foreign income primarily derived from operations in Puerto Rico, Switzerland, Ireland, the Netherlands, Costa Rica, Singapore, and Malta.” Additionally, Abbott stated that it “benefits from a combination of favorable statutory tax rules, tax rulings, grants, and exemptions in these tax jurisdictions.”

The United States is by far Abbott’s biggest customer market and profit center. In 2021 alone Abbott sold over $16 billion worth of pharmaceutical goods to U.S. customers. That is six times more than its second biggest market, Germany, and seven times more than its third biggest market, China. In fact, in 2021 Abbott sold more pharmaceutical products in the United States than Germany, China, Japan, India, Canada and Switzerland combined. Yet despite all of this, it is unclear how much of Abbott’s income is being reported offshore for tax purposes.

I have long been concerned that the poor design of the 2017 Republican tax law resulted in a massive giveaway to giant corporations that use offshore subsidiaries to avoid paying taxes on U.S. prescription drug sales. A recent report by the Committee exposed how flaws in the international provisions of the Republican tax law created loopholes that allow drug companies to shift profits offshore for tax purposes. In one case, a major U.S. drug company generated 75% of its sales to U.S. consumers yet booked 99% of its taxable income offshore using entities located in Bermuda and elsewhere.

The American public deserves to understand why Abbott, a multinational pharmaceutical corporation with annual sales of $43 billion, paid a lower tax rate than a postal service worker or a preschool teacher. This includes providing the American public a full understanding of the extent to which Abbott has exploited the Republican tax law to reduce taxes on U.S. drug sales through the use of offshore subsidiaries.

1. For each of tax years 2019 – 2021, please provide a detailed country-by-country breakdown of Abbott’s pre-tax earnings, profit margins, employee headcount, and tax paid.

a) Please also provide copies of Abbott’s IRS form 8975 for tax years 2019 – 2021.

2. What was Abbott’s taxable income each year for the years 2019 – 2021? What was Abbott’s taxable income in each year excluding income of controlled foreign corporations?

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