Tag / tax inversions

by Frank Maduri

Follow Up: Mylan, Tax Inversion, & The EpiPen Debacle Continues

The controversy behind Mylan and the EpiPen has again taken a prominent role in the news cycle after their highly scrutinized CEO testified before Congress last week. The hearing on Capitol Hill focused on the $608 list price for a two pack of EpiPen product and the many ways that the amount is impacted by what their CEO called a “broken” healthcare system to arrive at a profit number of $100 per two pack of the EpiPen.

Then, the news comes out today that the profit figure of $100 was inaccurate and that Mylan actually makes 60% more in profit per two pack of this life saving product, so the “more accurate” figure is $160 in profit. The members of Congress were upset over the amount of profit they were making when they thought it was $100, I cannot imagine what their reaction was at this news today.

The explanation by Mylan regarding the change in the overall profit amount in this case was that they miscalculated the profits based on an incorrect corporate tax rate (while my fingers type the words – I cannot believe their excuse). The LA Times and CNBC did a great job in reporting this situation today, with the former news source interviewing a USC professor who has a very honest view on how badly Mylan looks after this “miscalculation” of profits.

The question naturally is raised: How can Mylan miscalculate their corporate tax rate? The other question: the corporate tax rate in the US is so high, that should have made their profits even lower if that is accurate?

The answer to the first question is murky, it appears that Mylan knew the tax rate all along and tried to present a different set of profit figures to Congress. The second question could be answered with the facts: Mylan based their original calculation on the standard U.S. corporate tax rate of 37.5% , but Mylan does not pay that rate of corporate taxes due to a tax inversion they completed in the past.

I have reported on tax inversions for years for several news sources, in brief, it is an accounting and business practice where a U.S. company can merge or obtain an overseas company and then change their corporate headquarters address to the country where they bought the controlling interest in the other company. That change in corporate headquarters location means that their corporate tax rate would be adjusted to the tax rate of the country they were now headquartered within.

In the case of Mylan, they completed an inversion to change their corporate headquarters to The Netherlands, so their U.S. tax rate should have been adjusted to about five times less than the current U.S. corporate tax, or around 7%. However, the reality is that some experts have reported to both CNBC and the LA Times that their corporate tax rate is close to zero. That fact is really going to get people angry.

Therefore, the adjusted Mylan numbers for profit are based off of a 7% tax rate in the U.S. which they actually do not pay, so those numbers are wholly inaccurate. The situation gets compounded when the fact remains that they sell about four million of the two packs of EpiPen products per year.

I keep coming back to the timing of this announcement. It has to have been divulged at this time because it was leaked and someone in the media had it or someone threatened the company that it would get released. Mylan had to get out “in front” of this story and even then it will be tough for them to withstand. The fact that they revealed this change in profit numbers today and that they misrepresented those figures to Congress is worthy of a full Congressional investigation into their business practices.

The other fact that this scenario uncovers is that Mylan pays next to nothing in corporate taxes and is still trying to “game the system” and price gouge a lifesaving product to the American public. These tax inversions are a huge problem for our country and they must be stopped, they allow a mechanism for big companies to get bigger and wealthier, while the average person gets a tax increase.

The healthcare system does have a great deal of problems currently, but dishonest corporate officials from a major pharmaceutical company surrounding a multi-billion dollar drug product that families need to provide lifesaving measures for a patient in need is totally outrageous. This completely rapacious behavior and unbridled pursuit of greed by some of these corporations must be halted.

The EpiPen is a product that should be provided at a fair price to the Americans who need it, and Mylan should be ashamed that they conducted themselves in this manner. Please contact your local Congressional representative if you feel that Mylan should be investigated by Congress for their mishandling of this situation. The American people have a right to know the true story behind the profits this company made from their greed driven price gouging of this essential product and we cannot trust their accountants in case they “miscalculate” again.
Mylan is going to find out that this is a firestorm that they will need some serious resolve to withstand and a generic form of the product is not going to make this situation better. In fact the amount of profit they have made is so disturbing to so many people, it will take a long time before this situation is repaired.

There is a hacker online right now who has made the news with a method he put on YouTube which demonstrates how you can take ingredients and make your own EpiPen at home for a lot less. It is these sorts of practices that should could have a disastrous impact on the safety of the drug and that will defeat the purpose that both Mylan and the U.S. government are supposed to protect: the health and well-being of the patient. That is a truly frightening prognosis.

by Frank Maduri

The Great Escape: Pfizer’s Takeover Bid of Allergan

The pharmaceutical giant known as Pfizer is the latest industry giant to pursue the takeover of a smaller competitor in order to relocate their corporate offices overseas to avoid U.S. corporate taxation. In a transaction known as a tax inversion or “inversions” Pfizer is attempting to obtain Allergan, the maker of Botox among other industry leading products, for $150 billion dollars according to many media reports.

 

Allergan is headquartered in Ireland, which has one of the lowest corporate taxation rates in the world (17%) compared to the U.S. which depending on the size of the company is much higher (it is estimated that Pfizer has a taxation rate around 37%). I wrote an article for UPI previously on this topic when Walgreens mulled a shift of their corporate HQ to the UK and then disbanded the plan (http://www.upi.com/Top_News/Analysis/Outside-View/2014/07/25/Economic-patriotism-and-US-corporate-tax-inversion/6741406146830/).

 

This news comes amid the reports that the Department of Treasury is about to announce some changes in the rules for mergers and acquisitions which will make it more difficult for companies to complete these type of inversion transactions. The other political force at play here is the election cycle which the issue of inversions will be a hot topic for the 2016 Presidential campaign trail.

 

Counterpoint

 

The argument made by Pfizer for the defense of this transaction and the justification for it has three different components:

 

  1. Pfizer will still be spending a ton of money in the U.S. on R&D, employee payroll taxes, and other business spending to boost the domestic economy
  2. The change in HQ to Ireland will allow them to more easily access the foreign currency accounts they have for the business they conduct in their overseas units.
  3. The Pfizer financial advisors have made statements to the media that the bigger issue to the antiquated U.S. tax codes and business regulations which create an environment in their words which is “uncompetitive”.

 

In fair balance, they make some valid points but the fact remains that Pfizer has joined the ranks of other large companies in the pharmaceutical space and beyond to move their headquarters out of the United States which really negatively impacts the American economy from several perspectives.

 

First, the government has to make up that gap in the tax revenues they will lose from that corporation (especially one the size of Pfizer) relocating. The next big issue is the loss of the jobs which are generally higher paying and suitable for candidates with a higher level of education. The recent unemployment reports will demonstrate that our domestic economy is lacking those types of higher paying jobs and that millions of people with college and advanced degrees are “underemployed” working several part time jobs to supplement the income of a full time position that does not exist.

 

It is also bad for the public perception of America to have these corporations relocate and that should be the impetus for Congress and the leaders of businesses to get together and forge some type of agreement that works for both sides to avoid these types of inversions in the future. We all have a vested interest in making America remain the best nation on Earth. We have to work together to make that possible in the future.