Most of the major U.S. pharmaceutical companies (AbbVie, Amgen, Bristol Myers Squibb, Eli Lilly, Johnson and Johnson, Merck, and Pfizer) have reported the amount they have set aside out of their 2024 profit to pay their U.S. corporate income tax bill.

That number—when the provisions of the top six U.S. companies by revenue is summed—is zero. Less than zero, actually—as several companies report tax losses.

Only Eli Lilly actually set aside a significant sum (roughly $1 billion) for its tax payments to the U.S. Treasury.

What’s more, this result is in no way an aberration. The same companies didn’t set aside any funds to pay 2023 corporate income tax to the U.S. either.* It is a direct function of keeping intellectual property offshore, investing to produce valuable patent protected drugs offshore, and booking the profit on U.S. sales offshore. In other words, it’s the predictable result of the tax and production structures that most large U.S. pharmaceutical companies have adopted following the 2017 Tax Cut and Jobs Act (TCJA).

The lack of tax payments in the U.S. should not be a surprise. The typical large U.S. pharmaceutical company reports losing money on their U.S. operations. Lots of money apparently.

Merck reported a loss of almost $2 billion in the U.S. while making $22 billion abroad. Johnson and Johnson reported losing just under $500 million in the U.S. while making $17 billion abroad. Pfizer reported U.S. losses of around $500 million while making $9 billion abroad. AbbVie apparently lost nearly $8 billion in the U.S. while making over $11 billion abroad (mostly in Bermuda) and Bristol Myers Squibb reported a loss of $15 billion in the U.S. (tied to the accounting of an acquisition) and $6.5 billion of foreign profits.

The pattern is clear, and consistent across time. Large U.S. pharmaceutical companies apparently never make much money in the United States itself.

This, of course, is a big charade. The cost of producing a drug is low relative to its sales price (gross margins are high, see the pharmaceutical companies’ 10-Ks!), and the U.S., with its famously generous drug pricing, should be the companies’ biggest profit center. It certainly accounts for the bulk of the revenue of the U.S. pharmaceutical companies (and for most European pharmaceutical companies too).

The firms are obviously shifting profits on their U.S. sales out of the U.S.—something that generally requires actually producing the drug offshore (or in Puerto Rico, which is offshore for corporate income tax purposes thanks to the Jones Act).

Since the companies are reporting income abroad and losses in the U.S., it isn’t a total surprise that they’re now paying the bulk of their corporate income tax abroad. If the largest U.S. pharmaceutical companies are assessed as a group, all the funds that they set aside to cover their 2023 and 2024 corporate income tax bill were set aside to cover taxes outside the United States. Nothing was set aside to pay current U.S. taxes.

This is, again, a direct function of the incentives created by the TCJA, which might be renamed the (Pharmaceutical) Tax Cuts and (Irish) Jobs Act.

The Trump-Ryan tax reform of 2017 radically changed the structure of U.S. corporate income tax—ending deferral, and the large tax distinction between offshore and onshore profits. It also created three important tax rates.

1. The 21 percent headline U.S. corporate income tax rate.
2. The 13.125 percent reduced rate on the export of intangibles (foreign derived intangible income, or FDII)—a big benefit to major tech firms like Alphabet/Google—and now, Nvidia—that have on-shored their core intellectual property.
3. 10.5 percent global minimum on intangible income (aka GILTI).

Most income on pharmaceutical production stems from “intangibles.” The actual production costs are low; the profit comes from the right to produce and market a particular drug that has been proved to be medically useful.

Pharmaceutical companies looked at this tax code and naturally concluded that they would rather pay 10.5 percent than 21 percent, as the 13.125 percent rate wasn’t available for U.S. sales.

Getting out of the headline tax rate basically required producing abroad; the U.S. tax code frowns upon on firms that develop IP in the U.S., produce in the U.S., and sell to the U.S. while claiming that the tax home of the relevant IP is abroad (this is called Subpart F).

That’s why U.S. imports of pharmaceuticals soared after the TCJA (more than doubling between 2017 and 2024) and are now nearly a percentage point of U.S. GDP. That’s why a host of U.S. companies have made major investments in production facilities in low-tax jurisdictions like Ireland, Singapore, and others.

Thus, the net result of the TCJA is now clear.

U.S. pharmaceutical companies are paying less tax overall thanks to the combination of offshore production, offshore taxation and the 10.5 percent GILTI minimum rate. Senator Wyden and his staff have highlighted AbbVie here. Pfizer is another case in point.

The big U.S. pharmaceutical companies essentially have stopped paying tax in the United States altogether. The absence of any funds set aside in 2023 and 2024 against U.S. corporate income tax is a clear tell.

The companies are paying meaningful sums abroad; think $10-15 billion a year on non-pandemic profits of around $70 billion. 

The Tax Cuts and Jobs Act turned out to be an “America Last” tax policy in two ways: producing in the U.S. last, paying tax in the U.S. last.

What’s more, there are clear alternatives. Denmark's 22 percent corporate income tax rate is not really different from the U.S. headline rate of 21 percent. But it doesn’t let Danish firms develop drugs in Denmark and shift the intellectual property to Ireland.

Denmark’s tax revenue doesn’t depend on whether a Danish-owned pharmaceutical company produces in Denmark or the U.S. Novo Nordisk produces its weight loss drug in the U.S. (while Eli Lilly looks to be importing its drug from Ireland) while still paying the bulk of its corporate tax in Demark. In fact, it is safe to say the Novo Nordisk’s corporate tax payments in Denmark far exceed the combined U.S. corporate tax payments of the top six American pharmaceutical companies.

The reforms needed here are obvious:

1. A higher U.S. minimum tax, denying firms the ability to transfer profits on U.S. sales offshore simply by producing offshore (restoring the original impact of Subpart F).
2. Limiting the ability of firms to claim tax breaks on research and development conducted in the U.S. if the resulting intellectual property is moved offshore.
3. Taxing the profits on the intrafirm transfer of intellectual property.

A good tax lawyer is needed, but this isn’t impossible. Look at Denmark’s taxation of Novo Nordisk as a model.

The result, at a minimum, would be around $10 billion of new U.S. corporate income tax revenue a year ($100 billion or more over 10 years) with no change in the headline corporate tax rate, (the total could be even higher if the U.S. profit was taxed at 21 percent, rather than ~15 percent), and more production of U.S. pharmaceuticals in the U.S.

But the needed reforms require revisiting the core international provisions of the TCJA—something that the Trump administration currently doesn’t seem to be exploring.

Rather, the Trump administration (which does actually care about large bilateral trade deficits like the deficit the U.S. runs with Ireland) is looking at significant sectoral tariffs on imports of pharmaceuticals.

That could be interesting.

Big pharma will be quick to point out that Trump is taxing them, not “foreigners,” and the big companies will no doubt try to get exemptions and exclusions for imports from Ireland, Belgium, and Singapore (Switzerland is mostly used by, well, the Swiss companies).

And the pharmaceutical companies will try to pass on the cost of a tariff—25 percent of $250 billion of imports and something like $200 billion of imports of high value, patent protected medicines is $75 billion—to private insurers, and then to adjust the price paid by Medicare and Medicaid (the U.S. would thus end up paying the price of the tariff).

But if the insurers refuse, the pharmaceutical companies will face an interesting choice. Either:

1. Suck it up and pay the tariff without raising their prices. Their margins are enormous, and they could afford it. Their post-tax income, though, would fall dramatically. In a sense, they’d be betting that the tariffs on pharmaceuticals won’t stick.
2. Repatriate their IP, and contract with their Irish and Singaporean operations to import the drugs at near production cost (say, 10 percent of the sales price). This would radically lower reported imports; the import price is the price paid by the U.S. headquarters to its subsidiary in Ireland or Singapore without changing real imports. And it would mean that the companies would have to pay tax in the U.S. at the headline rate (21 percent, potentially 15, though, if Trump gets his way). This of course has its risks too, as tax structures are hard to reestablish once they have been undone, and the firms would be at risk of higher U.S. taxation should the U.S. corporate income tax increase under future budget pressure (over time actual production might also move to the U.S.)

It should be interesting.

The bigger point is simple: a lot of the features of global trade that Trump doesn’t like are not a direct function of the nefarious practices of America’s trade partners, but rather a result of the perverse incentives to offshore in the Trump tax code. The best first policy here is thus simply to reform the corporate tax code.

The result would be more U.S. production of pharmaceuticals and specialty chemicals, of soda concentrate (Pepsi and Coke offshore…), and of high value-added, sophisticated industrial machines like those used to make semiconductors (Applied Materials and Lam Research produce in southeast Asia to move profit out of the U.S.; their tax disclosure mirrors the structure of big pharmaceutical companies).

It would be a win-win-win: more U.S. tax revenue, more U.S. jobs, and a smaller U.S. trade deficit and thus less trade tension.**

Background for fact checkers; the 2024 10-K numbers:

* Pfizer disingenuously reports its U.S. cash payments, but that sum is entirely a function of paying out the “exit” tax (deemed repatriation) on their pre-TCJA offshore income (which theoretically was taxed at 35 percent, but the tax could be indefinitely deferred as long as it was notionally held offshore. Pfizer had stashed a lot of profit offshore and thus faced a large bill. Pfizer’s word games here didn’t impress Senator Wyden last fall. The real issue now is not what firms are still paying to settle the deemed repatriation bill on their pre-TCJA offshore cash stash, but rather what the firms are setting aside to pay U.S. tax out of their 2023 and 2024 profit. Pfizer clearly is reluctant to disclose its current tax arrangement with Singapore in particular.

** The impact of pharmaceutical trade on the trade balance in goods would be much larger than the impact of the sector on the current account balance, as the current tax avoidance schemes raise the offshore profits of U.S. firms (while reducing their onshore profits) and thus artificially inflate the U.S. income balance—a point that the IMF could make much more forcefully in its surveillance of the United States.