Magazine Article | March 1, 2016

The U.S. Tax Man Cometh, The U.S. Corporations Leaveth

Source: Life Science Leader

By Rob Wright, Chief Editor, Life Science Leader
Follow Me On Twitter @RfwrightLSL

Getting organized to file our annual household tax return, I ponder how we as a society have allowed the U.S. federal tax code to grow so complex that it requires 13 miles of paper to contain it. For an employee it can be easy to forget the number of hurdles entrepreneurs overcome to found the businesses that pay the wages we use to provide for our families. Do you think that when Peter Hecht, the CEO of Ironwood Pharmaceuticals and subject of this month's cover feature, first set out to build a sustainable pharmaceutical company back in 1998, he and his cofounders truly understood the challenges that lay before them? We're not just talking about spending a million dollars to file an NDA (new drug aspplication) plus a few hundred million more in R&D. What about taxes (e.g., federal and state unemployment, social security, Medicare, and net investment income taxes)? If ever profitable, the company faces paying either an alternative minimum tax (AMT) or the third highest corporate tax rate in the world (i.e., 39 percent). Oh, let's not forget that once your company reaches a certain size you'll also need to provide health insurance. Early clinical trial success for a lifesaving drug may result in folks demanding inclusion on grounds of compassionate use. Finally, if fortunate enough to get a drug developed and approved, however it's priced, it is likely to face significant political and public scrutiny.

Starting a business anywhere is hard. But doesn't it seem, in the land of opportunity, that starting a biotech is just a little bit harder, especially today? And for those that have succeeded, shouldn't we be trying to provide more incentives for them to stay rather than creating further disincentives that push them to leave? Since 1982, 51 U.S. companies have reincorporated in low-tax countries. But even more telling is the fact that 20 of these have happened in just the past three years — this despite 2004 legislation intended to abolish the practice! We have moved from an average of losing one company a year for 30 years, to more than six a year the past three years. In response, the Obama administration opted for a further tightening of tax-inversion rules. The result of this "Katie bar the door" mentality is the tragic loss of yet another American institution — Pfizer, a company older than 3M, Ford, GE, Coke, and Major League Baseball.

While U.S. legislators continue to enact more stringent guidelines (and penalties) for U.S. corporations seeking tax relief, Ireland has been welcoming them with a corporate tax rate of 12.5 percent — a rate less than all of the BRICs (Brazil - 34, Russia - 20, India - 34.6, and China - 25) and high-tech hubs such as Singapore (17) and Hong Kong (16.5). Heck, it's less than Lebanon (15)! Of Ireland's 20 biggest incorporated companies, 12 were founded in the U.S.; six are life science companies (Alkermes, Allergan, Endo, Jazz, Medtronic, and Perrigo). Ireland understands that the key to its continued GDP growth is policy making that encourages continued foreign direct investment (FDI). Though it was a European that first stated you can catch more flies with honey than vinegar, it was our own FDA that proved this to be true (e.g., incentive programs spur the drug development you want). To stop the current U.S. corporate exodus requires similar forward thinking, as well as your action. If you haven't written your senator or congressman, now would be a good time to do so. After all, Pfizer was as American as apple pie, and if it can leave, what other U.S. corporate giants might soon follow?